Bring it On: the Tougher it Looks the Better the UK will do..

Blain’s Morning Porridge, September 2^nd 2021: Bring it On: the Tougher it Looks the Better the UK will do..

“but with a little bit of luck, with a little bit of luck, someone else will do the blinking work…”

This morning: The UK is going through periodic angst as everything looks terrible and we wonder how to balance the budget, pay the bills and avoid penury. Relax. We worry too much. Everyone else is cooking their national accounts. The UK can do it better. Buying Boots at the Ready!

 The news from the UK this morning looks and sounds pretty bleak:

• The money-pit that is our National Health Service is going to need another £12 bln just to do what it is supposed to be doing.
• Schools are demanding a further £6 bln or else we can forget “educating” our kids.
• The social costs of the pandemic and a looming refugee crisis will be enormous warn concerned liberals.
• The Ministry of Running Away is planning to move our submarine “boomer” fleet to a foreign country if Scotland wins independence. (Hmm.. why not just leave it in what will be a foreign country.. ie Scotland?)
• The schools are reopening so there are a host of talking heads on the google-box warning COVID cases will spike, and half the news last night was about a wee-girl who got long-Covid last year and hasn’t been able to ride her pony so much.
• The Unions are bleating on about wage rises, climate change, LGBTXYZness, and a promising a winter of more than mild unpleasantness… if anyone is listening.
• UK House prices are rising at record rates, the costs of building materials have gone through the roof on the back of supply chain kinks, and the shortage of Lorry drivers means we will all likely starve at Christmas.

Aha.. It feels just like 1979…

There was some great music then like My Sharona, Boogie Wonderland, Oliver’s Army and Eating Trifles by the Jam…. And Inflation of about 2 billion percent. (I occasionally exaggerate. it might have been 20%, which is somewhat more than the 4% the Bank expects this year.)

As we so often say here in Blighty; When all around are panicking… time to pull on your buying boots. While there may be few reasons to be immediately cheerful, there are lots of interesting developments occurring.

First up, we have a new chief economist at the Bank of England: Goldman Sachs alumni Huw Pill who also spent time at the ECB. Most folk are focused on the fact he’s yet another former Squid – joining Ex-Goldmans staffers Chancellor Rishi Sunak and BOE Deputy Ben Broadbent in the corridors of power.

His appointment is distinctly hawkish. Unlike his predecessor Andy Haldane, who was apt to dismiss concerns about monetary creation and the burgeoning national debt while embracing recovery spending, Pill is a traditionalist when it comes to the dangers of experimental monetary policy and their fiscal consequences. That’s got implications for future policy in terms of New Monetary Theory free spenders vs Austerity balanced budget supporters.

The upside for the UK is Pill is a senior voice at the Bank and on the Monetary Policy Rate-setting Committee (MPC) who understands the importance of central bank independence. While the ECB is now run by a French politician whose objective has been securing ECB primacy over nation states’ monetary and fiscal policy as an adjunct of the unelected European Commission, and the Fed is lying on its back hoping to have its tummy tickled for juicing the US economy on behalf of government, the choice of Pill is interesting.

According the Torygraph, Mr Pill is “a staunch critic of limitless money printing”. He once wrote to fellow ex-Squid and Bank of England Governor Mark Carney warning about how central bank interest-rate distortion and “the dangers of unelected central banks technocrats enjoying unconstrained discretion with policies inconsistent with liberal democratic principles.” Spot on Mr Pill. He has also warned on the dangerous consequences of QE on markets.

It looks highly likely present Bank Governor Andrew Bailey, together with Pill, will lead the MPC towards tighter policy, and curb the excesses of QE – and its’ multilevel consequences on markets, including financial asset inflation, rising inequality, and a busted capitalist system.

The potential downside is a slide back towards Austerity spending policy becomes more likely. As we all know Austerity Spending in the face of Recession looks and sounds a really, really stupid idea. But don’t underestimate our present government….

If the UK decides to cut spending and balance the budget there will be pain. The alternative is to continue spending to keep the nation on its feet. If the UK can’t liberally create cash on the balance sheet… (Which is what QE is: the Government via the Treasury sells Gilts in the morning creating a liability, while the Bank of England buys them in the afternoon creating an matching asset. Result: Govt has money. Notional National Debt increased.) … what kind of fiscal and monetary problems could that create?

No matter how much debt the UK creates via QE, the UK will not default.

We own our own printing presses. We can create as much money as we wish… but… but.. but again… if we create so much money that inflation leaps from financial assets into the real economy (as it is now doing), and the FX markets start to lose confidence because of the burgeoning national debt creating inflation, then either interest rates have to rise to protect sterling (creating all kinds of employment misery), or the currency collapses causing a massive negative inflationary feedback loop.

Or both happen – stagflation.

Ooops.

The alternative is to balance the budget – which in the face of revolting GPs who still decline to see patients face-to-face, teachers demanding danger money for speaking to kids, and trade unionists grabbing any opportunity to be even slightly relevant again… means the next few years are going to be …… fraxious for the UK.

It feels like the UK faces a choice between the fire or the frying pan, the devil or the deep blue sea. Or at least it would be if everywhere else wasn’t just as badly off.. I suspect the UK will be able to get away with a modicum of monetary creation and pretend its balancing the budget via Austerity lite.

If every other nation is playing silly buggers with debt, then the arguments about the right policy for Britain are pretty simple:

In the US: as hinted earlier, there is a very real danger the Federal Reserve becomes little more than an adjunct of government. Many left-wing Democratic congressmembers think and act like it there to do the Government’s bidding. If its role is to juice markets to create economic confidence to meet its employment objectives and price stability is now market stability.. then that’s a very different world. If the Fed executes a modest taper, and continues to juice markets then the UK can coat-tail that policy.

China has removed itself from the equation. The last 12 months have seen a dramatic switch around from capitalism with some minor socialist characteristics, towards a fully Stalinist economy with commerce and industry directed to servicing state objectives – the latest being clamping down on video gaming as the Peoples’ Army realises its diminishing pool of recruits are fat, lazy and unmotivated after spending their young lives 24/7 gaming.  The state is heading towards full direction of the economy – which features as its central core deliberately bursting the current asset bubble to shatter any perceptions that markets are fair and good.

In Europe, in the wake of frightening inflation numbers from France and Germany there is talk the ECB is set to wind down its QE bond buying as early as this month. But even a modest slowdown in Pandemic Emergency Purchase Programmes (PEPP) will likely be offset by other programmes and long-term low rates.

ECB President Christine Lagarde has effectively transformed the ECB to serve the political objectives of the EU – which boil down to keeping Yoorp together. She still has politicking to do – placating the Germans about inflation and convincing them ECB lending programmes don’t amount to German monetary financing of Italy. She dances the politics deftly. By establishing the ECB as defacto bond issuer for the bloc through new funding programmes, it’s in the EU’s interest to continue to hold rates artificially low to stimulate the weaker economies. In effect: the EU has achieved defacto financial sovereignty and the ability to fund Europe, while member states have lost it.

The key for the UK in the face of ECB policy will be being able to coat-tail long-term low rates across Europe, and likely the US. Perversely, slightly higher rates in the UK will prove attractive to FX meaning the UK’s Debt Management Office will have few funding problems, it will boost UK business, and the UK will be able to find balance on spending..

Excellent. As I said.. buying boots at the ready.. And I would note how I managed to write a whole article about the UK’s potential prospects without referring to the political incompetency of the Boris Johnson Government thrice…

Five Things To Read This Morning

NYT – A new Coal Mine in England (must read for anyone who has followed the saga of West Cumbria Mining.)

BBerg – Europe’s Waning Crisis Sparks ECB Debate on Ending Stimulus

BBerg – Bill Gross Says Bonds are “Investment Garbage” Just like Cash

FT – Tokyo stock market eclipsed by the four Tech leviathans

WSJ – Europe’s Banks Get a Cash Boost From ECB Credit Moves

Out of time, and back to the day job

Bill Blain

Strategist, Shard Capital