Blain’s Morning Porridge – May 13th 2020 – Rising Policy Risks
“How should men in suits know best when they never brought up the kids?”
Headlines remain focused on the Coronavirus. Its terrible, its frightening, its tragic and it’s a very real threat. But it isn’t the primary story. Neither is yesterday’s small wobble in stocks. Markets are becoming increasingly irrelevant..
This is what is going to really matter – the risk of policy mistakes making the coming recession much much worse!
This morning documents were leaked which reveal how the monetary orthodox UK Treasury plans for Chancellor Rishi Sunak to cut spending, raise taxes and reverse bailouts. They want it announced in a matter of weeks: Exclusive: Treasury blueprint to raise taxes and freeze wages to pay for £300 bln coronavirus bill.
(Full marks to the Daily Telegraph for breaking the story. My grandfather sagely instructed me to read the “Torygraph” first thing every day: “To know what the enemy is thinking.”)
The Treasury plan looks a tad premature… We are still in immediate crisis mode. They are also utterly misguided.
The virus is the smoking gun pointed at the heart of the $90 trillion global economy. It’s bad. There is blood and gore everywhere. Just how bad we don’t yet know, but it’s clear of we don’t choose the right policies/treatments to address the deepening economic catastrophe, then we’re doomed.
Governments around the globe have enacted extraordinary measures to protect economies and workers. The costs are going to be enormous. It’s likely we’ll require years, not months, of extraordinary support to keep fractured economies together as we find a new balance in the wake of the virus. Closing them down too early would be a massive policy misstep.
There is massive uncertainty on how to treat the wound the virus has caused. The forces of monetary orthodoxy versus the radicals of New Monetary Theory are likely to stage a face off. The Orthodoxy wants us to remain financially prudent based on everything we think we know about money. The radicals are willing to ignore the perceived risks of debasement, inflation and confidence by throwing however much money is required at the crisis, and embrace the addictive madness that is NMT.
Any doctor would tell you: save the patient and worry about the consequences later. Consequences there will be….
Getting the recovery policies wrong now could prove as devasting to recovery as a renewed wave of virus infection. As is ever the case, neither economic camp is likely to be entirely right – but if the global economy is going to recover and emerge as anything close to functional, then I’m afraid we don’t have much choice but to hope the NMT camp is more right than the orthodoxy. Unfortunately, there is always bias towards the orthodoxy – which is why I’m worried.
The Treasury proposals – marked “Official – market sensitive” – warn the government to act swiftly “to enhance credibility and boost investor confidence in the UK economy.” They suggest immediately announcing measures to address the crisis and a base-case expected £337 bln budget deficit. Actions include tax rises equivalent to a 5 pence rise, dropping promises on state pensions, and a public sector pay freeze. It all sounds very sensible.. (!)
Under the worst-case Treasury scenario – an L-Shaped economic decline – the budget deficit could hit £515 bln this year, and £1.19 bln over 5-years. These are scary numbers. They present the worst economic outlook for the UK economy since the war. The forces of monetary orthodoxy are embedded within the Treasury – and they control the bureaucracy and the policy levers.
The Bank of England looked to be a nest of preening orthodoxy under arch-remoaner Mark Carney, but I do think there is hope for the new Bank of England Governor Andrew Bailey. His comments about keeping lending open – maintaining bank and corporate liquidity and solvency (and his adoption of QE Infinity) hint at a governor who gets it.
What the Treasury orthodoxy effectively proposes is a return to the Austerity policies which worked so well since 2008 (US readers, obvious sarcasm alert). They aim to avoid stagflation and the kind of currency and balance of payments crisis that triggered the UK to beg money from the IMF in 1976. It’s the financial equivalent of preparing to fight the next war (which will be about cyberspace, tech and logistics), by equipping our forces with the 1815 Brown Bess musket and a handful of lead shot.
Let’s see how popular Boris’ government remains after bailing out big business by increasing taxes, capping the pay of NHS and key-worker wages, and dropping more pensioners into poverty. The man is a populist – and chief henchman Dominic Cummings a realist – so there is hope it won’t happen. It looks like Rishi Sunak gets it. He resisted pressure to swiftly cut furloughed salary schemes and is extending them till October, while encouraging part-time work for furloughed staff.
The reality the monetary radicals perceive is a greatly changed global economy and all rules change. Every economy is going to wrestle with the same economic shock and crisis. Some economies with strong currencies and credibility – which includes the UK – will be better positioned than others to enable effectively unlimited monetary and fiscal bailout. They control the money printing presses. There is uncertainty to how long they can remain immune to a loss of confidence. On one hand, that’s up to government. On the other, every other economy is in the same pickle!
The weapons to avoid (or, at least delay) a sovereign debt crisis are proven – QE Infinity, which boils down to printing more money (It needs refined), and keeping interest rates low to avoid triggering waves of corporate debt insolvency.
The growth reality is simple. Every single corporate on the planet is going to figure out the outlook. If they are watching and listening to governments rein in spending too early and institute austerity spending, then they will predict and prepare for deeper recession. If every corporate is cutting investment plans, reducing headcount, and instituting cost controls – then the economic effect is inevitable; rising unemployment and an ongoing demand shock.
This is the time to be spending our way out the Coronavirus recession.
It doesn’t all have to be negative. Losing our God-given-right to an exotic beach holiday every year spells a massive boost to staycations! (Why did I not buy that cottage in Rock last year!!) It’s going to change, not end, the way we do business. Redirecting the resources currently employed in aerospace towards renewables and new tech will take time – but is possible. Time is the critical ingredient we need to re-order the economy.
If there isn’t a vaccine soon, the border will remain closed and global trade will wither. Protectionism and the growing China/US cold war will deepen. Get used to a new normal economy.
The big unknown is inflation. There are clearly risks. There was no inflation after 2008 and QE – inflation was contained in financial asset prices which went through the roof. Its happening again in this crisis. Will it spread to the real economy?
We are in unchartered waters. There has never been an economic collapse like this one. This time it is different.
Have a quick read of a great piece on Bloomberg this morning: a series of pithy one-liners from leading economists, investors and bankers on What Our Post-Pandemic Future Looks Like.
Five Things to Read This Morning
Out of time, and back to the day job…