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The Global Money Tree Policy

Well, the US Election went about as badly as we could have thought. At the point of writing this article, there is no clear winner for the White House.

Any hopes of an outright Biden win are now looking unlikely as he needed a clear majority in the Senate to win control of that house. A Republican led Senate will prove a thorn in the side to a new Democrat President which will likely just lead to a stalemate in Washington.

This US election has been so much more difficult as the CV19 virus led more people to use a postal vote. Indeed, the amount of postal votes shot up in this election from around 21% in 2016 to around 39% of the population this time around. Mr Trump seems anxious not to include these postal votes which represent around 80 million people.

Worryingly, it appears that both candidates are prepared to fight all the way through the Supreme Court to win their point. The voting system in the States is governed at local levels in different ways by different states. This means that multiple court cases could ensue if there are contested states.

To offer some perspective, contested elections have happened previously in America. Indeed, in 2000, the state of Florida became the focus of the world until the Democrats conceded defeat. During that period, the US stock market fell around 5.6% in four days.

Whilst we might find it shocking and rather ‘Un-British’ to appear a sore loser. This approach to elections is really nothing new to the U.S.

We expect markets to be volatile over the coming weeks, but this honestly isn’t the end of the world – not yet!

My worry at this time, is the worlds’ addiction to ‘stimulus’.  So what are we talking about here and why does it matter?

When a country experiences a downturn, it can seek to apply two kinds of stimulus via Monetary Policy or Fiscal Policy.  The fiscal policy is the stuff of governments and generally comes in the form of tax breaks, benefits and (of late) job retention schemes.

The monetary policy is the preserve of Central Banks such as the Bank of England. They seek to stimulate markets by ‘widening the money supply’ (creating more money to spend).

Both forms of stimulus involve basically producing more money by borrowing it from the markets. The markets then sell this debt on to Pension and Investment funds – we commonly know this debt as Gilts or Bonds.

So far so good….

The market functions whilst there is confidence in the safety of this debt. So long as the country concerned can service their debt and their currency is perceived as ‘safe’ – this system can continue.  However, there comes a point where a country is borrowing money to service previous debt. This is akin to a Ponzi scheme where new money is being used to cover old.

Eventually, confidence ebbs in the borrower and the market either demands more interest to lend more, or stops buying the debt altogether. This can theoretically decimate existing Gilts and Bonds which feeds through to the general publics’ Pensions and some Investments.

The UK is now at debt to GDP levels not seen in over 50 years and the Bank of England is set on more stimulus (borrowing) in the coming weeks.

The Reserve Bank of Australia carried out $100 billion of stimulus this week and the United States is waiting to launch a $2.5 trillion stimulus package once the election is settled.

These huge numbers are starting to lose relevance, so Katy shared some statistics with me to try and offer some perspective.

If we imagined ever pound of borrowing as a second of time, 1 million seconds would actually equate to 11 days, 13 hours and 46 minutes.

1 billion seconds would equate to 31 ½ years!

But 1 Trillion seconds would equate to 31,688 years!

There has to come a point where the Global Money Tree finally stops the merry go round of borrowing money to print again. However, it may be many years before collective governments possess the will power to address this issue.  In the meantime, our financial system will be underpinned by the ethos of passing on debt to future generations to make todays problems the priority.

This is a dark time for our economy and society. However, a vaccine is now looking more and more likely, our clients’ portfolios are in amazing condition and we break out of lockdown on Monday! (Sorry English Cousins!)

The numbers being reported in the headlines are often politicised and skewed in such a way that people are currently becoming really afraid and depressed. At Thomas and Thomas we constantly strive to look past the headlines, to use information to better effect, for the benefit of our clients’ financial plans.

I will make another video either in the next lock down if we get one – or when we have something valuable to add. We also will be in touch for our Quarterly Proactive reviews in December. Until then, stay safe, happy and well.

My very best wishes

Darren

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