Blain’s Morning Porridge 22^nd August 2024: Economic Cycles and Thinking Outside the Sovereign Debt Box.

“The national debt, if it is not excessive, will be to us a national blessing”

The global economy is reaching a nexus point as multiple cycles and challenges coincide – successful nations will recognise and exploit the new opportunities as they emerge. In the UK, it’s time for the new Labour government to stop trying to be marginally better tories than the Tories were, and embrace debt solutions!

Bill’s Pub to Club Swim:

Let me remind readers about Bill Blain’s Pub to Club Swim on September 14^th. Its a Charity Event in support of Wessex Heartbeat, the cardiac care charity.. I will be swimming 2.5 miles down the River Hamble as a thank you to the Medical Staff who care for cardiac patients and their families. You don’t have to anything except click the link – here – and make a donation.

Without Heartbeat, well, you would not be reading the Morning Porridge.

Yesterday I promised something a little more considered than a short rant about Disney’s evil lawyers – although greedy, self-serving corporates preying on consumers are but one facet of what makes the global investment environment so imperfect these days. Imperfections abound and are a natural state of affairs.

The markets sense there is trouble ahead. The early August Market Judder on AI deliverability costs lasted a few days. It was quickly superceded by expectations the Fed will ease interest rates in September – a jam-tomorrow promise. It all feels rather short-term, and the long awaited Fed easing may even prove a sell-the-fact event. My gut-feel is a correction (rather than crash) is still a high probability event in Sept/October when it becomes clear the scope of interest easing is limited, and the uncertainties around the US election increasingly dominate the market’s focus. I’m hedged in Gold.

Let’s assume global markets survive the US election, refusals by Trumpniks to accept the result don’t lead to civil war, and we kick off 2025 in a sort of happy, looking forwards place… What is then more interesting is where the financial markets and the global economy are headed in the medium/long-term? That rather depends on events, events dear boy, and the underlying economic environment…

Let’s start with what we know – the global economy is at a fascinating nexus point in terms of:

1. The global Long-Term Economic Cycle – (which some call a Kondratiev Cycle or K-Wave) a 60-70 year tech-driven growth pattern which began in the 1960s, developing around themes of information technology and processing, is evolving into the next cycle. The last 60 years has been an extraordinary period of growth and uneasy peace. How different will the new cycle be? What new tech will it spawn? What new risks will it raise? (This is a topic for a book, rather than a single bullet point!)
2. A short-term re-establishment of interest-rate cycles is underway as Central Banks steer markets back to the discipline of Normalised Interest Rates even as Mr Market mistakenly hopes zero interest rates are the base case – they are not.
3. Domestic Political Cycles are reaching a crescendo of political distrust and polarisation, fuelled by interference and disinformation across truth, justice, liberty and themes including immigration and competition.
4. Internal dissent is driven by the widening Income and Power Inequality between the haves and haves-not of society, between an increasingly tiny number of billionaires vs a squeezed middle class and close-to-poverty working classes. That has fuelled populism, diminishing the effectiveness and trust in democracy.
5. The challenge for global hegemony between China and the US in the long-term Geopolitical Cycle, called Rise and Fall or the Thucydides Trap, has drawn new lines in terms of alliances on the global map.
6. Percieved risks of a multi Sovereign Financial Debt Crisis are emerging as nations find themselves bust and broke as a consequence of QE, the pandemic and the age of financialization.

Many market observers believe these forces are set to collide, inevitably ending badly in a destructive market reset, global conflict and increased domestic instability. Runaway inflation, currency crises, and economic depression will occur as heavily indebted nations struggle to finance themselves. The doomsters point to the rising degree of inequality, polarisation and financial crisis across all economies, and how shifts towards protectionism and conflict are unavoidable.

Yep. Maybe.

Personally, I’m not so negative.

There is nothing like a good crisis to fuel the imagination and human invention. Neither am I convinced history, politics and economics are predictable or cyclic – although they are certainly repetitive! What I do see is a general trend in the affairs of men to respond to crises by turning them into opportunities…. but that there are inevitably winners and losers through any periods of acute change.

The key issue for me is the underlying market environment – will it prove positive or negative to enable solutions? To understand how requires us to delve – once more – into the effect of politics and society on the economy. If politicians can address the debt problem, solve the issues around inequality, address political ineffectiveness by combatting disinformation, and improve the prospects for growth through national infrastructure – then the odds of the next 60 years being an era of growth and success dramatically improve.

In terms of government, it’s a matter of irrefutable truth governments are the very worst way to spend or plan an economy – except for any other alternative, as proven by the stunning lack of success of privatised state monopolies to deliver the kind of service or cost improvements promised by La Thatcher 50 years ago. There are things governments should do – let’s call them what they are, common goods like infrastructure, health, education, defence, security, law and order and welfare. For the economy to work, these are not options – they are necessities.

In terms of society, economic history proves that free markets, capitalism and democracies deliver the greatest economic and technological advances because people are enabled to succeed and fail by light touch regulation, political freedoms, low taxes and entrepreneurial respect! Yay! Free markets deliver stronger growth than state planned economies.

The big fear for markets is what a generalised Sovereign Debt Crisis would spawn across all other asset classes – contagion risk. But, what if there were ways to stop worrying about the problem of national debt? “What evil magic does he propose? To tinker with the unalterable laws of monetary economics will tear asunder the very structure of the financialverse…” No.. it wont – just some slight of pen with the national accounts…

The new UK Government operates under the Labour brand, but it’s a small “c” centrist conservative administration talking about the need for austerity spending, and cuts in services to balance the books. They are broadly tweaking consensus policies on balanced budgets and funding – trapped in the same costed, fully-funded, small-to-middling mindset as Rishi Sunak post the Liz Truss debacle. That is a tactical problem and a strategic mistake.

What the UK needs to ensure future success is a complete overhaul; the reform, reinvention, rejuvenation and reconstruction of the economy. These are big topics – a successful reform of the NHS would be as groundbreaking as the original Beveridge Report of 1944! Unfortunately, the NHS is just one problem among many. To restore a modicum of political effectiveness to the UK economy the government has to demonstrate multiple similar scale successes across housing, defence, infrastructure modernisation, and our global trade relations. (There, I just wrote Brexit without mentioning Brexit – bet that gets some hostile comments..)

Labour will not succeed by waiting for the economy to recover, and hoping the debt burden reduces itself.

There are multiple ways the Government can shake the straightjacket of conventional economic monetary thinking: (These are all things I’ve written about previously in the Morning Porridge.)

• The Bank of England holds about £688 bln of Gilts from the QE era. Write them off with a “Zonk” – a coin valued at £688 bln, the ultimate in zero-coupon perpetual assets. It could cut the UK’s debt to GDP ratio to around 72%.
• Establish a National Housing Fund to finance a massive affordable inner-city housing programme on under-used land through private debt – providing a conduit for housing associations, local authorities and private enterprise to build cheap, affordable accommodation where it is needed.
• Take a chill pill about debt. The UK is politically stable – that gives it the credibility to borrow. Debt is not a bad thing. Former Bank of England staffer Andrew Sentence summed it up rather well in the Times earlier this week: “It’s time to stop thinking public borrowing is a bad thing..”

We need some bigger, more imaginative thinking in Downing Street… Time for Labour to address the nation’s destiny and opportunities instead of trying to be better conservatives than the Conservatives were.. (which, to be frank, is hardly a challenging goal..)

Out of time, back to the day job…

Bill Blain

CEO and Founder,

Wind Shift Capital

www.windshift.capital

Blain’s Pub to Club Swim.