I’m sure I’m not alone in sensing that, away from the hot-house trading environment, frustration with the aftermath of the global financial crisis remains as strong now as it was seven or eight years ago, along with an appreciation that we’re running out of monetary and fiscal sticking plasters.
Last night I was out at the pub with the boys where we toasted the birthdays of two of them. Present in our little crowd was a neighbour of mine who is managing director (that’s CEO in old currency) of a British-based but German-owned business. He has apparently been asked to appear at the next group MD’s conference and give a presentation on Brexit. The convivial beer round soon turned into a pretty serious and grown-up debate about the pros and the cons of Brexit. I think it does all of us good from time to time to exit our ivory towers and to take on board a bit of grass-roots opinion.
There we are this morning faced with a further softening of the Chinese economy with both the demand and the supply side disappointing. July retail sales were forecast to fall to 10.5% in July from 10.6% in June but missed by dropping to 10.2% year-on-year while July industrial production, forecast to remain unchanged at 6.2% for the same period fell to 6.0% - while the news headlines trumpet the Dow, the S&P and the Nasdaq all making new all-time highs. This, so I’m told, is the first time that we have had the “trifecta” since 1999.
Confidence remains high that the PBoC will continue to be accommodative while the Fed shilly-shallies around by deferring and deferring the normalisation of the interest rate structure. With the ECB going nowhere, the BoE in easing mode and the BoJ stuck with Abenomics and the Aussies and Kiwis in easing mode too, equity investors might be right. Right not from a valuation perspective but right from the view point that everybody is now scared of their own shadow and nobody has the guts to be the first to declare that ZIRP and NIRP have basically been an expensive exercise in futility.
All the while, the axioms that make fiat currencies work are also being undermined. Fiat currencies work on the basis that they are collectively accepted and exist entirely on trust. If the central banks’ credibility is undermined, so the currencies they respectively control will go down with them.
Time for some more blue-sky thinking.
Well, it’s not quite blue-sky for what I am about to propose appeared as an idea in this column a few years back. Remarkably, other than interest rates being lower by previously unthinkable magnitudes, not much has changed. Thus I shall repeat.
Virtually every government in the world would love to launch a “New Deal” throwing significant money into infrastructure spending. Much is talked about and every election campaign, the current one in the US included, focuses on the promise to create jobs and growth by spending on the long overdue renewal of much of the infrastructure that dates back to the age of Roosevelt’s original New Deal in the 1930s. The problem is that most governments are already indebted up to the eyeballs and if growth brings rising interest rates, it also risks bankrupting nations with unsustainable debt piles. A Gordian knot if ever there was one.
Alexander the Great is supposed to have resolved the original knot, not by carefully unravelling the thing, but by simply slashing through it with one stroke of his sword. That was ancient Macedonian “thinking outside the box”. So let’s try the following exercise:
On a given day or night – possibly at a weekend – every single member of the G20 declares simultaneously, unconditionally and irrevocably that all its outstanding debts over one year – so not bills – will be devalued to 90 cents in the dollar or 90% of face, whatever currency it is issued in, end of. That would at a stroke wipe US$1trn off the US debt pile, ¥30trn off Japan’s debt, £100bn in the UK and so on and so forth. This would free up considerable reserves without bankrupting the whole economy.
If you think how widely government debt is distributed, such a mass action writedown would hurt everybody somewhat but nobody mortally – unless of course they have their entire savings stuck in government bonds which they should never have done in the first place and even then it would only be 10% of the total, a loss that equity markets can generate in two days without too much effort.
The key to the action would have to be that all countries would have to do it at the same time in order to prevent cash flowing from one market to the other. It would have to be “ratings neutral” by all governments doing the same writedown. One big synchronised action would save everybody’s blushes and the ganging up by markets that characterises the appearance of weakness in a single fiscal unit could not happen. There will be no flight to quality trade because there will be no relative quality.
The action would have to be taken swiftly and without the reams of learned studies from within the central banks’ research departments. The monetary authorities with the support of governments would have to shoot from the hip without any clear knowledge of what lies ahead.
If Control & Compliance and Health & Safety had ruled in 1492, Columbus would still be stuck at home building unsinkable life-rafts with digital trackers and Alexander’s sword would have been too blunt to cut through Gordias’ famous knot. Thus it was also generally agreed in the pub last night that the EU has in many respects painted itself into a corner and that the way to escape the problem was not to fiddle around looking for ever finer brushes but to simply kick over the paint pot. Could a jolly good kick not also move us out of the ZIRP/NIRP gridlock?
Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. I noted at this time last week that I didn’t care how many medals Britain won (as long as it was more than France) and that I wanted to enjoy watching some of the little guys do well. I have so far had both. My congratulations go to Fiji which won its first ever Olympic medal yesterday as its rugby sevens side took gold by comprehensively trouncing GB in the finals. If a team ever deserved such a triumph, it is that of the boys in black and white. That, to me, embodies the true Olympic spirit. As the athletics events begin to get underway we can hopefully look forward to more of the same. Finally, could somebody please clarify whether the BBC or I am right? “The Olympic Games is…” or “The Olympic games are…”. No prizes for guessing who uses which…
PS: For those among you who have young awaiting A Level results, due out next Thursday, my fingers and toes are crossed…