The Times They Are A-Changin’: Be Careful What You Wish For 

 

 

“It’s my own design 

      It’s my own remorse” 

 

Trump was dealt a winning hand and is playing it badly. 

 

When he started his second term, Trump said US and its economy “went to hell” under Biden. “We inherited from the last administration an economic catastrophe and an inflation nightmare.” 

It didn’t; Biden left behind him a strong economy, especially when compared to the mess Trump’s first term bequeathed him.  

 

Biden’s results speak for themselves:  

• 16 million jobs created,  C.7 million more than pre-Covid;  

• Incomes up C.$4,000, accounting for inflation—with wages rising fastest for lower and middle-income Americans;  

• Inflation down to pre-pandemic levels;  

• Economic growth of >10% in less than four years;  

• Stock market recorded a series of highs – up more than 50%. 

 

Heather Long, economist at The Washington Post, said: “this is a great economy…growth is strong, unemployment is low, inflation is back down.” 

Paul Krugman writing as Biden left office, said the US had what was “very close to a Goldilocks economy, in which everything is more or less just right.” 

It hadn’t all been blue sky, housing affordability was still a problem. Inflation, which had risen to uncomfortable levels, was caused by external events such as the pandemic, which led to worldwide supply chain problems, and Putin’s war in Ukraine, which pushed up food and fuel prices.  

Today there is an economic catastrophe and an inflation nightmare and it’s all Trump’s doing. 

 

‘Today there is an economic catastrophe and an inflation nightmare and it’s all Trump’s doing’ 

 

When he returned to office inflation was 3%, in May it peaked at 4.2%, today it is 3.4%. The biggest contributors to this increase are gasoline prices which have risen 27.4% yoy, and fuel oil prices which have  increased 52%.  

Both directly attributable to Trump’s Iran war which started on 28th February; that month inflation was 2.4% in March it was 3.3%. 

Inflation is the enemy of bond investors as it erodes the real value of the coupon payments. 

Despite US Treasuries being viewed as risk-free, the market is showing signs of severe stress. 

A recent auction of $70 billion five-year notes, closed at 5.033%, the highest yield at a 5-year sale in almost two decades, and 64bps above what the same auction had paid a month earlier. Bids coverage at 2.21x was the thinnest since December 2018. 

Looking at the 30-yrs Treasury, yields have increased over the last 3-months from 4.9% to 5.6%. When the Treasury tried to buy back some of its own long bonds, holders offered >$10bln, over double the $4bln it was willing to take. 

 

Reports from Treasury International Capital show that foreign holdings of Treasuries fell $50.4 billion in July to $9.25 trillion, the second consecutive monthly decline.  

 

• China cut its holdings to $618 billion, the lowest since August 2008, less than half the $1.32 trillion it held at its November 2013 peak.  

• France and Canada posted the largest declines of the month.  

• Japan, still the largest foreign creditor, cut its position by $12.8 billion to about $1.1 trillion. 

 

The August report isn’t due until mid-October, but it isn’t expected to make happy reading, especially as  Japan spent a record sum defending its currency and sold foreign securities to do it. 

Logically, you might expect that with yields of 5%+, the creditors who financed American deficits for a generation would keep going, instead they are exiting. If price isn’t the problem, what is? 

In the UK, the picture is similar. In the last 12-months the 10-yrs yield has increased from 4.7% to 5.4%, and the 30-yrs from 5.2% to 5.9%. 

There are all manner of reasons for this; higher debt burdens due to the GFC and Covid, inflationary pressures due to wars in Ukraine and Iran, aging demographics, political uncertainty. 

None of the above are unique to the UK. 

 

‘a PM who wants to reverse neoliberalism, increasing the size of the state and reindustrialising’

 

We do, however, have a PM who wants to reverse neoliberalism, increasing the size of the state and reindustrialising.  

There is also an ongoing cost-of-living crisis to contend with, which continues to worsen due to rising energy costs. With Chancellor Healey’s first budget only weeks away, there are expectations of him being forced to raise taxes or cut spending. Both will take money out of an economy that is already struggling. 

The opposition will respond, saying were are living beyond our means, “maxing out the nation’s credit card.” 

This ignores the fact that any country which prints its own currency can never “max out”, this is simply a convenient narrative for right-wing politicians and their media, feeding their aversion to public spending.  

The answer to this reality is, as Keynes said in 1942: “Anything we can actually do we can afford.” Without this can-do mentality the Attlee government would never have created the welfare state. At that point, our debt was in excess of 250% of national income – over double today’s level. 

“Anything we can actually do we can afford.”

 

The same can be said about “black holes” in the public finances when government appear likely to miss the borrowing targets set out in their fiscal rules. These rules, which are portrayed as absolute are, in fact, arbitrary, created by chancellors to demonstrate their prudence with the public purse. As we have seen, when needs be they are ditched. 

The right, given their natural dislike of public spending money, spin these self-imposed targets as: “That’s all very well but how are you going to pay for it?” 

This attitude is ongoing, as is the doom-loop that has been our inheritance from Thatcherism. 

Neoliberalism is based on markets deciding, going forward we need to look at how governments in East Asia, such as China, Japan, Taiwan and South Korea, have created their go-go manufacturing based economies with them picking the winners. This is exactly what Thatcher did with financial services. 

Much of what the chancellor can do is predicted by the reaction of financial markets. Bizarrely, to keep them happy his best option is more of the same, which is exactly the actions that are already damaging our economy. 

The UK electorate voted for change because it was necessary, the US electorate voted for a change that wasn’t necessary…. “Be careful what you wish for, you just might get it“ 

 

 

“If you live for revenge, gonna feel the backlash
If you live to be cruel, gonna bite you in the ass” 

 

This is really the tale of two countries.

One, the US, was conned into wanting change by a shameless liar, who just wanted power.

His ability to deride the previous government’s economic success shows how fickle and/or stupid many people are.

Aside from revamping the economy, the president was going to avoid foreign wars.

If you were scoring out of 10, zero would be the conclusion. Failure at every level.

In the UK, whilst we score much better, not all of the damage is self-inflicted.

We weren’t conned into wanting change, but we have the right to feel that the person conning us couldn’t or wouldn’t deliver change.

The latest incumbent is too new to score.

He clearly wants change and has identified the issues: neoliberalism creating financial and regional inequality; Brexit, which has failed on all levels.

The question is, will he, at some point, bite the bullet. To spend more he needs more funds. Either we raise revenues (i.e., taxes) or we cut services.

There is probably a considerable amount of fat to trim from social spending. However, there is a salutary lesson…

Upon taking office in 1979, Thatcher and her cabinet aimed for immediate public spending and civil service staff cuts of 10% to 20%.

According to the Institute for Fiscal Studies (IFS), total public spending actually increased by an average of 1.1% a year in real terms across her entire era.

Be careful what you wish for….

Lyrically, we open with “Everybody Wants To Rule The World” by Tears for Fears and end with “Live by the Sword” by The Rolling Stones.

A good w/e to all

Philip.

 

@coldwarsteve

 

 

 

Philip Gilbert is a city-based corporate financier, and former investment banker.

Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s

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