If you played schoolboy rugby in the 1990s, you’ll be familiar with the substance known as “Magic Spray”. I’m not sure what exactly was in it, all I know is that it was made illegal at some point due to the damage it was doing to public schoolboys up and down the land (maybe Labour think this is a good thing and will promise to make it legal again at the next election).
In short: it was sprayed from a weird looking bottle after a
painful contact, and it sort of froze the injured body part – broken leg,
snapped clavicle etc – and within seconds, the pain had gone and you could run
around again. Clearly, it wouldn’t address the actual damage – and you’d find
the next day you’d be in total agony, and have done far, far more damage than
you would have otherwise – as you would’ve essentially still run around on a
broken leg for 30 minutes the day before, just without pain.
This is sort of where we are with the UK economy. Furlough,
and £400 billion of spending have kept everyone in suspended animation, with
massive economic damage done, but no real pain felt as yet (and I don’t mean
disrespect to those who have suffered individual economic downturns – I’m just
talking generally). Rishi has jammed open the printing presses, sprayed the
magic spray, and we’re temporarily up on our feet, pretending everything’s
fine.
But it’s not fine. We are in enormous trouble – our economy
has just had its biggest fall for centuries. There is a perhaps light at the
end of the tunnel – but we’re about to find out whether this is in fact just an
on-coming train, or the flash of light of a thermonuclear explosion.
I am in two minds about what will happen: either a fairly
short-term economic stress event will transpire or, perhaps more likely, a
continued sugar-boom for a year or two, before a reckoning of some sort, once
the high wears off.
I think the evidence for the latter is quite compelling, as
long as we have no more lockdowns (a big if): after all, it is important to
note that there has been approx.. £170 billion in private savings built up
during the last year, as those with decent fixed incomes haven’t been able to
spend, and have hoarded cash instead. I know a few boomers who have bought new
Porches recently, for example.
On the other hand, however, this group – the Pandemic
Lockdown Winners - tend to be high up the income distribution, exactly the sort
of people who tend to ultimately save, rather than splurge (except on Porches).
Those further down the income scale, or those who haven’t done well, who have
lost jobs or had their businesses closed down by the Stasi currently running
the country – in fact, about half the UK – have often done very, very badly.
The amount of money pumped into the economy by governments
has by any account been staggering. To take the US, on whom we all depend: the
US government has spent $8 trillion in the last year. And the entire tax take
of the US authorities over the same period? $3.5 trillion (for those who
aren’t maths buffs: this is less).
And Biden has just passed a bill to spend a further $1.9
trillion, and is now proposing a further $3 trillion. This is all being done
through central banks creating this money completely out of thin air –
and thus without increasing the measly amount of money the government is actually
collecting in taxes….is this sustainable in the long run? Well, that’s the
question (spoiler: no, of course not, don’t be silly).
In 2009 the central banks such as the Fed told us that this
unconventional stimulus was temporary. Twelve years on, they are pumping £100
billion into the economy every month.
Meanwhile, we’re told by central banks that any inflation is
transitory, and all is well in the West.
But the US owes $31 trillion. Global economic indicators are
not good. Just to take a random example: 30 year Greek government debt is
currently cheaper than US debt – Greece being a country who’s own financial
system is essentially based on imaginary Monopoly money - or as the Greeks
call it: Monopolopolopoly money. (Ed: I am not removing this, this is a good
joke.)
Given all the money being printed across the west, it’s
hardly surprising stocks, house prices and hard assets generally are going up –
as this is what most of the newly minted money is currently being pumped into. I finally made a
correct prediction coming out of the first lockdown, after being so incorrect
time and time again previously: as I finally fully understood that house prices
are not a function of supply and demand, but a function of credit, which I
think made me the only person - who didn’t think he was also Napoleon - to
correctly predict that house prices would go up in the UK in 2020. Money
printing = higher house prices, at least in the short term.
House prices may even have further to climb, in nominal
terms at least.
It is however an iron law of economic history that societies
that manipulate their money supplies eventually create uncontrollable
inflation, which in turn leads to economic chaos, and political instability.
The questions is, how long can we run around on our broken
leg before the magic spray wears off?
Quite a while, perhaps. But it’s still going to hurt
eventually…
