Blain’s Morning Porridge 18th Dec 2024: Polarisation, WASPI women, Farage, Treasuries and What Argentina Can Teach the West?
“Frosty wind made moan, earth stood hard as iron, water like a stone.”
A big question for 2025 is how resilient the US Treasury market will be to tax cuts, spending hikes and the deficit surpassing $40 bln in 2026! Trump is going to slash spending – taking tips from Argentina’s Javier Milei. Will it work – and is it suitable policy? Here in the UK, govt is taking tough decisions, but we are poised at the edge of the rabbit hole as polarisation looks set to dominate!
I fear publishing y’day’s Porridge; Adrian Jones’ essay comparing Elon Musk to Thomas Cromwell, Henry VIII’s fixer, may have illustrated there are better writers and thinkers out there. To any fund manager out there – please hire Adrian, he’s a top infrastructure guy – and I am now terrified he will wipe me out if he starts a daily market commentary!
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The US, Argentina and Spending Cuts
One of the key themes for 2025 will be just what kind of crisis might new US Treasury Secretary Scott Bessent will face dealing with US Treasury funding if Trump cuts taxes and spends more. A surging US deficit does not bode well for the US Bond market or the dollar. Hence the credence given to hopes Elon Musk and his ministry will make dogged spending cuts – DOGE (see what I did there….) There is no doubt that lower taxes and lower US interest rates – as Trump has oft promised to deliver (whether the Fed likes it or not), could provide a massive market turbocharged lift – but at what cost to the dollar?
The jury is sceptical just what Musk might achieve in terms of slashing spending. But, he will be encouraged by how it’s played out elsewhere: one of the biggest stories of 2024 has been the apparent success of President Javier Milei turning around the nightmare that has for decades been the Argentine Economy. Milei has become Trump’s poster boy for libertarian policy.
Milei’s approach to Argentina’s multiple economic ills; hyperinflation, repeating defaults and a distrusted currency, has been called chainsaw government – slashing state spending, getting rid of multiple ministries and state agencies, cutting the state sector from 44% of GDP to 32%, putting thousands of civil servants out of work, while pushing nearly 60% of the population into relative poverty. The currency has halved in value. Inflation has been slashed to levels that would please any central banker. The economy will shrink 4% this year.
Remarkably, it seems to be working.
Despite the enforced economic pain, the polis seem to have adopted a wartime “in-it-together” outlook – accepting high costs are required to ensure future wealth and stability. They remain generally favourable to Milei as President – despite his tiny share of the direct vote. A crisis shared is a crisis halved – someone probably said. For the time in forever, Argentina is not running a fiscal deficit. The economy is set to boom in 2025.
Anarcho-Capitalism it’s been called. It’s Libertarian Roll-back-the-state to the nth degree. Trump loves it! Every MAGA supporter is an instant expert on the reasons for the success of Milei’s policies – and wants them enacted immediately on Trump’s accession to the Resolute Throne! Their demands are simple – roll back and destroy the deep state. Spend less. Regulate less. Free the state from the dead hand of bureaucracy, regulation and wokist themes like DEI and social justice.
I would love to understand exactly how chainsaw austerity worked in Argentina – I have no special insight. But it’s clear Argentina does not suffer from the same problems as the UK and USA. The harsh economic medicine that’s worked for Argentina, might be bitter gall for other economies. The Land of Silver has a long history of inescapable economic and political catastrophe – unlike the expectation of economic exceptionalism that characterises the belief of most Americans. In the 1890s it was one of the richest nations on the earth – since then it’s been a succession of despotic governments enriching themselves. I’m wondering if there was a significant element of “anything is worth a try”.
Will it work in the US?
While slashing spending may avoid the deficit hitting $40 trillion sometime in early 2026 – the consequences on the Great Divide between the fantabulously wealthy and the dirt-poor in the USA will likely widen – and it’s the relatively poor that voted for MAGA on the basis Trump is going to lift them up. Defence and Veteran Care is untouchable (but may be reformable). Unravelling Medicare would impact vast numbers of Americans, those least likely to be healthy – the ones RFK Jnr wants to save by cutting $100 bln plus of subsidies on junk food. Persuading US legislators to stop pork-barrelling spending programmes will be a challenge in a political system where patronage and delivering programs literally buys votes and support.
Cuts are more likely on the periphery – schools, transport subsidies, foreign aid, the Green/Environmental lobby ($100 bln on IRA renewables subsidy), housing and rent, communities, and (just like here in the UK) rich folk pretending to be farmers to farm agri-subsidies – but these won’t save much more than $500 bln – a rounding error in deficit terms – and would have serious knock-on effects across the economy.
A massive programme of deregulation is as likely to boost corporate profits, making the wealthy wealthier, but will it increase productivity? There is no guarantee easier regulations will raise wages and increase employment – especially as AI transforms the economy. Wages in the US smokestack states could continue to stagnate.
Would Milei’s policies work in the already strong and vibrant US economy? Or might they actually backfire?
Might Milei’s Chainsaw Economy be a recipe for Europe and the UK?
In the UK this morning, we have outraged indignation the newish Labour Government has decided not to honour the claims of WASPI women that they should be compensated for not realising the state retirement age of women was being raised from 60 to 65, the same as men. Labour decided the cost – in excess of £10 bln – was simply too high for the country to bear. It’s been jumped on again as broken promises, Labour showing its contempt for the elderly – part of a concerted attached against pensioners (winter fuel allowance), farmers (Inheritance Tax) and now elderly women.
On the other hand – it’s also realistic policy, making a clear statement there is only so much money, not every mistake can be reversed, and focusing limited money where it is most needed is critical. Tax and pensions are the bane of our lives – but it’s our responsibility to understand them. Because a number of women did not grasp the significance of changes (heralded over 15 years before enacted gradually from 2010), is not a reason to compensate everyone.
Labour are making courageous, difficult decisions – that will cost them votes. That’s what government should be doing. Even if they succeed, the upside may come too late to save them in our 5-year electoral cycle.
Sound policy is not resonating with voters. There is growing groundswell of economic despair in the UK… nothing works. The gloom is being fanned and inflamed by populist leaning Social Media. The message is nothing appears fixable. Our new government may be under-promising – but there is little hope they will over deliver. We are taxed more to pay for ineffective and costly bureaucracy. Housing prices are generally as high, if not higher, than US but wages are about half – savings are generally all spent.
But, slashing spending on services, and particularly cutting the enormous burden burgeoning public sector pensions impose on budgets, are moves no government would be willing to risk. Slashing spending on collapsing services would make the Farmers recent protests look a love-in. Cutting civil service and armed forces pensions – who knows the reaction?
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One of the points Adrian made so well y’day in his guest post y’day was most folk don’t care for the extreme polarised perspectives that make the most noise and dominate the social media feeds. They just want things to improve.
Yesterday, the headline that grabbed my eye was from the Torygraph: The Lion King – Disney’s hero gets a craven woke makeover. Wow, it might just be a film review, but it was straight between the eyes in terms of a headline setting the big agenda for 2025. In the push-pull of the modern world, Anti-Wokery is going to be a single dominant polarising theme through 2025. Trump has made it his battle-cry! Kemi Badenough will make it her slogan! Nigel Farage will use Musk’s money to crush woke.
However essentially decent the left may think they are – they will be drowned in a torrent of pushback.
The tide has turned. The Anti-Woke wave is a victor’s reaction to the last decade of being told what we must think, say and do. I consider myself left of centre (last card-carrying communist in the City of London), enlightened and a supporter of all the equalities, but please don’t ram it down my throat. Renaming London railway lines Windrush and Suffragette just confuses me.
Sadly, the reality for the UK is whatever the govt tries to do to reform, recalibrate and rebuild the UK economy is going to be buried in a torrent of reaction – some of which will stick. It will be even more destructive is Elon Musk decides to disrupt a foreign sovereign nation by giving Nigel Farage $100mm.
It will be like giving a kid a box of matches in a fireworks factory.
Out of time, and back to the day job
Bill Blain
Author of the Morning Porridge
Founder, Windshift Capital
One Comment
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How is plunging 60% of the population into relative poverty “fixing the economy”? This seems to be a fundamental misconception amongst a lot of people as to what “the economy” is.
The Reserve Bank of Australis says the following about “the economy”:
“An economy is the system for deciding how scarce resources are used so that goods and services can be produced and consumed. Resources are things like land, people (who can work or innovate through their ideas) and raw materials. They are seen as scarce because we have unlimited wants but there are not enough resources to produce the goods and services to satisfy these wants.”
Ergo, it is NOT GDP or inflation or national debt. It is a SYSTEM for deciding how we want to support our population with limited resources available. Fixing the economy would mean fixing ghe system, not just moving a line on a graph of a metric that will be meaningless to the majority of the population.
Labour are therefore not making “courageous decisions”, they are offering “more of the same” and hoping no-one notices (spoiler alert, most people already have, pity they didn’t read the non-manifesto in advance).
Courageous would be:
Nationalising the Energy Sector for £1 in order that “profits” went to tax payers and that prices could be controlled (as in France) AND such that proper planning for generation capacity could be carried out (which takes more than 5 years) rather than relying on “the market” to deliver something (does anyone really think Hinckley Point is being delivered cost effectively?).
Nationalising the Water companies for £1 and planning to fix that mess long term (without ludicrous ideas about passing the cost onto bill payers).
Centrally planning and funding the building of lots of council houses (oh dear, boo hiss I hear) rather than wishy washy planning reforms that will just end up shovelling more money into developers pockets by a different route.
And so forth.
Actually re-setting “the economy” by ensuring that public services are genuinely in public hands (don’t even dream of claiming that the NHS is in public hands!) and hence planning, costs and benefits can be delivered without the whim of the market would make a real difference to people’s lives.
None of the above would be even mildly controversial in Scandinavia.
Complaining about fixing “black holes” whilst doing ABSOLUTELY ZERO to fix the mess caused by the last 45 years of wanton governmental destruction of our society is not my definition of courageous.