Today’s ‘mini budget’ was really the trumpet call for the new Government who are determined to use a strong capitalist ‘Keynesian’ approach to the UK economy.
The Government argue that you can’t tax your way to a growing economy – you have to stimulate it – and I have to agree with this.
It was fascinating this week to hear the US President offer his veiled criticism of the UK Governments big plans to dig its way out of a recession. ‘I’m done with trickle-down economics – it doesn’t work’ said Uncle Joe.
Maybe Uncle Joe has forgotten that it was the radical theory of British Lord John Maynard Keynes that got America out of its own 1930’s depression.
Keynes argued that fiscal loosening such as tax cuts and Government borrowing created more money within the economy; as the wealthier households spent and invested greater amounts – thus stimulating economic growth to ultimately pull everyone’s living standards up.
This is the fundamental basis of Capitalism.
Over the past decade, we have seen Western governments embarrassed of Capitalism – sitting on their hands and virtue signalling to an ever disengaged electorate – whilst their Central Bankers throw money at the economy to boost asset values.
This is known as Quantitative Easing or QE – and it is lazy economic policy in my view.
QE got the West out of a real hole in 2008 after the collapse of the global banking system. Much needed cash was pumped back into high street banks – via asset purchases – by Central Banks.
However, it created great unfairness as asset prices rose and considerable amounts of cash didn’t find their way down to poorer households.
This meant that those already with assets – such as a house – became wealthier, whilst those without assets became poorer. I don’t believe that it is correct to say that the poor actually ‘paid for QE’. However, it is almost impossible to argue that QE didn’t have two unintended consequences.
Unfairness and Inflation.
Maybe this was what Uncle Joe was getting upset about this week? Who knows?
The huge point here, is that (in the blink of an eye) Central Bankers have suddenly had enough of QE. They have now embarked upon something called QT (Yes, you’ve guessed it ….. Quantitative Tightening).
QT is the exact opposite to QE. This is where the Central Banks sell back all those billions of assets that they purchased over the last decade – into the markets.
This literally has the opposite effect to QE. It means that there is now a large SELLER in the market and it reverses the effect of asset rises and making people feel that they can spend easily.
I am convinced that both the Bank of England and US Federal Reserve are now aiming to cause a controlled recession (if there is such a thing). They need to do this to get wage demand down. After all, you probably won’t demand a pay rise if you just feel lucky to have a job right?
In my eyes, it is utter madness that Central Banks are aiming to sell the very assets that they have just down valued – thus losing eye-watering amounts of money.
We have watched in horror as a previously ‘solid’ UK Gilt fund has fallen by 26% this year. Fortunately, we sold this fund for our clients before it fell – but this sort of thing should not be happening.
So what can Western Governments do?
In the US, the Democrats currently feel that they have time to sit this one out and let the FED resolve the problem.
In the UK, the Government has decided upon a truly brave (and some might even say irresponsible) approach. The announcements today such as removing the 45% income tax band and reducing basic rate tax to 19% – will be making the followers of ‘Osborne-omics’ very worried indeed.
However, this is a sign of the times. Years of stagnant growth need resolving.
The big question is ‘Who will come out of this on top?’ – The Bank of England or the UK Government?
Today’s news has further rocked Gilt and Bond markets. However, the Bank of England’s announcement to sell vast quantities of Bonds back into the market only yesterday, shows the chess match that is going on here. It would be very easy to blame todays mini budget for the falls, but I am not fully convinced the Bank of England didn’t cause the initial damage.
The removal of the National Insurance and Corporation Tax hikes may just help to save many small businesses across the country – and therefore keep the economy lights on. The reduction in income tax from April could also really help households as they reach the spring.
Honestly. I can’t tell you if today’s budget is good or bad for your portfolios at the moment. I can only tell you why I think it has happened.
I repeat my previous assertion that the main game in town at the moment is the US Stock Market. I have spoken with many fund analysts over the past weeks and general consensus is that the FED will stop hiking rates at around 4%. At their current trajectory, we don’t have a huge wait before this happens.
Once the FED stops putting rates up – I expect to see a serious rebound in US markets and thus Global Portfolios. I am really excited by the potential in this rebound when it comes.
It may well be that the US economy is plunged into recession before the 4% point even comes……and then Uncle Joe may have to dust off his Keynesian theory books.
In a strange and twisted way, recession may just be the starting flag for portfolio recovery.
As ever, please don’t suffer in silence. If you are worried about anything at all – please just call us. We are here for you 100% and nothing is too much trouble.
My very best wishes indeed. Darren