Blain’s Morning Porridge Oct 21st 2024: The Gormenghast economy – how to fix it.
‘His nose was pig-like, his eyes button-black and horribly alert, with enough rings about them to lasso and strangle at birth any idea that he was under fifty.”
The UK economy feels like Gormenghast. Labour wants to balance the books – but will just keep running to get no-where fast. We need an honest appraisal of the problem; a root and branch creative destruction of the bureaucracy of state. The Civil Service needs to learn to be agile and fail fast.
After yet more headlines about HS2 failures, spending choices and tax hikes, I am beginning to think we live in The Age of Gormenghast. If you’ve never read the Gothic fantasy novels of Mervyn Peake about rot, decline, decay and descent into madness… try them. You will be struck by the parallels with today’s Western Economies, particularly here in the UK.
As there was a full-on gale blowing half-pelicans on Sunday Morning, I made the mistake of reading the Papers – although I did go for swim into the teeth of the storm, (ah, the indescribable joy of being hit in the face by a breaking wave of freezing Solent slop..), walking the dog or going sailing wasn’t really an option.
Bad mistake opening the press. Either they are full of delirious optimism about our AI futures, but more likely the business pages were fulminating about the coming debt collapse of the West. Naturally, the Torygraph loudly tells its readers, the UK’s “unsustainable” debt load is entirely the fault of the new Labour government.
Once, we thought the problem the West had to solve was simply ensuring our economies were fit to support growth. A governments’ job was to provide security and healthy, well-educated, hard-working employees to drive the wheels of industry. It worked. Till it didn’t. Now the UK is once again agonising about spending billions on a railway no one can quite explain the need for.
All Western Economies now spend huge amount of money, raised by sucking taxes out of industry and consumers’ pockets, and borrow more and more, to deliver increasingly institutionalised sub-par public services and apparently irreparable national infrastructure. Ultimately, the sole purpose of the state could be paying state pensions, after slashing everything else. The UK in particular, resembles the crumbling Gormenghast castle. The trains don’t run, the sewers are broken, our defence is sub-par, let’s not even mention the succubus the NHS has evolved into.
At least the new Labour govt has the honesty to be doing something about the UK’s perilous finances. They recognise the UK’s public sector has to be paid for – which means taking “courageous” (ie election-losing, deeply unpopular) decisions. I can’t help but laugh when I read furious articles written by deposed Tories about how duplicitous Labour are.. daring to get themselves elected, and them having the utter temerity to actually propose doing something about it by tinkering with taxes – ie removing some of their benefits. Very bad show, they say.
I happen to agree with a story in the Sunday Times the UK could cover the current spending shortfall by borrowing £80bln from the Gilt Market to repair Broken Britain and fund green energy…. as long as the plans are clear and don’t look spendthrift, the market will be happy to give the UK as much debt rope as we require to hang ourselves. More debt is a short-term fix that could just create a bigger longer-term problem – unless the government gets more imaginative in liability management of that debt.
The problem is… I’m not sure Labour’s brave tax-raising and debt-discipline will be much more than a sticky plaster over the gaping flesh-wound that is the UK’s long-term financial outlook. Unless the UK adopts radical solutions and embraces a complete change in how the economy is managed and run, then I guarantee the next government, and the next after that will still be struggling to solve the problems at the core of economy.
It’s become the great dividing line in both politics and economics. On the left we have earnest politicians wanting to spend more and more on fixing the economy to make it work, while on the right we have them saying we should spend less and stop interfering in the economy. Economists argue about why government spending multipliers will make the economy stronger or how they crowd-out growth. Blah, blah, blah….
Yet, while Public services and infrastructure seem unsolvable, in the private sector we see incredible growth. Two things happen in the private sector that don’t happen in Government. 1) We see companies evolve and learn through failure. 2) They are run on commercial constraints.
I happen to loath Elon Musk – but credit where credit’s due, his agile approach to solving problems and willingness to embrace risk has created enormous value and success at Space X. (Tesla and Twitter are different matters.) That model of fail-fast, not worry about perfection, and avoid the sunk-cost effect of investing good money after bad, works well. In Musk’s case his approach to people is disgustingly transactional – fire them on a whim for underperformance, but, again it works.
Compare and contrast that Fail Fast approach in the private sector to the institutionalisation that characterises state bureaucracy across the globe. Here in the UK the state planning bureaucracy is the root of our housing and infrastructure crisis.
I picked up a book in Daunts the other day (best little bookshop in the City of London); Unit X. I flipped it open and read this quote on the front page:
“The second decade of the 21st Century was one of colossal missed opportunities for the US military. The Pentagon missed the advent of modern software development, the move to cloud computing, the commercial space revolution, the centrality of data, and the rise of machine learning. It’s a story of the US getting ambushed by the future.”
I was hooked. The book is fascinating. Expand the thesis, and the need to reform bureaucracy as the first step towards rebuilding successful economies in the west is clear.
Back in the USSR USA
Meanwhile, I give up on the US election. Not because I particularly care about the choice between Harris or Trump for President, or whether Democrats or Republicans should run the nation – a choice for Americans to make. What concerns me is the increasingly chaotic dishonesty of it all. Decency is out the window. Elon Musk is offering $1mm cash prizes to those who sign up their votes for Trump. “A house divided… cannot stand…” and all that. I predict a riot when the numbers are counted and done.
On Friday I wrote a note about how Online Betting on the crypto-platform Polymarket site was not a good indication of the likely result of the US election outcome, and how easy it would be for rumoured “whale-sized” bets in a tiny market to create an utterly false market. This morning my twitter feed is literally nothing but retweets and rehashes of the “irrefutable fact” based on “utterly reliable” on-line gambling trends showing Trump is set for a landslide. Meanwhile, my in-box runs a spate of articles about how Goldman Sachs and Morgan Stanley both predict a Trump clean slate across Presidency, Congress and The Senate because that is what rises in Bitcon, banks and crypto-firms is telling them.
My advice to Americans is simple – get over yourselves.
The Republicans should be miles ahead to win this election for similar reasons as incumbent parties have been beaten around the democratic world – in the UK, France, Germany and elsewhere – in 2024. History repeatedly shows governments that preside over rising interest rates, higher inflation, and a perception voters are losing out, get sacked because they get the blame.
Instead the Republicans are neck and neck – why? Because Donald Trump is simply the wrong candidate. He carries too much baggage – simple as. On every level. If the Republicans had stood any dull, normal, competent, sane, rational candidate, they would already be picking the new furniture for the Oval Office. And they would have won without destroying the democratic soul of America.
There are host of reasons why US voters are unhappy – but they boil down the nexus of confidence, the economy, and bad politics. I very much doubt the average American voter is earnestly deciphering the economic consequences of the respective election policies of each candidate – they are being overwhelmed by the political noise. That political noise is now deafening. People are unhappy because they feel they are losing out, and falling behind. Telling them that it’s not their fault, loudly and repeatedly, is Populist Politics 101.
The election should be about economic reality. In terms of the economics of the Biden administration from 2021-present; the most important factors in smashing the confidence of the electorate are largely exogenous (ie external shocks outside the control of politicians): the end of the Covid meant the financial adrenaline boosts stopped, the global economy went cold turkey in 2022 as it discovered supply chains remained broken, just as massive inflation triggered by Russia’s invasion hit energy costs. Whatever Donald J Trump tells you, President Biden did not press a big red button marked Inflation and another one headed Higher Interest Rates. Can you imagine what 2022 would have been like if a second term Trump had been blaming and undermining the Fed trying to address the inflation spike, likely making a bad situation worse?
Despite inflation and higher rates the US economy has done well – the stock market has shown tremendous strength. The economy has been the fastest growing among developed nations. Jobs are being created. There are problems, but both US Consumers and Corporates have shown themselves resilient under pressure.
As I said, it’s not for me to tell Americans who to vote for, but if you genuinely believe a trade war with Europe, breaking the trust at the core of the geopolitical axis of NATO that has so sustained the US as global hegemon, 100% tariffs on China, locking up political opponents, leveraging up the national balance sheet, while throwing anyone with a foreign twang or a different look across the border into Mexico, is going to make the US economy more equal, more prosperous and fairer..… be my guest.
Out of time and off to catch the London train.. .
Bill Blain
Author of the Morning Porridge, founder of Wind Shift Capital
