February 28, 2012
London, England
[Editor’s note: Tim Price, a frequent Sovereign Man contributor and Director of Investment at PFP Wealth Management in London, is filling in for Simon today.]
In December last year, the poet Alice Oswald withdrew from the TS Eliot poetry prize on the grounds that the prize was being sponsored by an investment company (Aurum, a fund of hedge funds manager).
How you feel about this principled stance may depend on whether you are a UK taxpayer. If you are a UK taxpayer, you will probably feel relieved that your tax pounds are no longer being squandered on the Arts Council’s sponsorship of the prize in question “a tiny victory” but a victory nevertheless against the arrogant dissipations of the state.
Ms Oswald seems to believe that poetry prizes should be funded with everybody else’s money, rather than by a private patron grown-up enough to be responsible for its discretionary expenditure (private patronage being what you might call “traditional” in the arts).
As a graduate in English Language and Literature, this commentator has no animus against poets. But I am not sure we want them in charge of the economy. They are notorious for starving in garrets for a reason.
Ms Oswald’s “protest” is part of a wider intellectual malaise that lazily conflates government spending with the real economy and which conveniently ignores the fact that without a flourishing private sector, there would be no government and certainly no government spending to speak of.
It is part of that lazy thinking that inspires journalists to keep speaking of “the government” spending money on this or that, as if “the government” were somehow sitting on an infinitely large pile of “government money” that most of the time it was unreasonably withholding from worthy causes.
The reason our economy is knackered is because successive governments have indeed pandered to subjective worthy causes with money that those governments did not possess.
Tomorrow and tomorrow and tomorrow, taxpayers will be paying the bill. It is not government money because the government doesn’t have any. It has liabilities only. It is taxpayers’ money.
The finest achievement to date of the UK’s coalition government has been a triumph of PR‚ as one might expect, given that PR appears to comprise the only work experience our current Prime Minister has ever had outside politics.
A myth has arisen, polished frequently by an ignorant media, that the British government has started to deal with the grotesque debt inherited from the previous government. But as Prosperity Capital’s chief economist Liam Halligan points out, government spending was actually higher for the fiscal year 2010/11 than under the last year of the last government.
The UK debt figures are also much worse than conventionally believed because 2011 debt including “interventions” stood at ~£2,270 billion as at September 2011, or 150% of UK GDP. To this we should add public sector pensions (~£1,100bn+), PFI (~£400bn+) and sundry other off-balance-sheet obligations of the state.
Liam Halligan’s bleak summary is that after five years of supposed austerity, UK government spending will be back to 2005 levels… but with twice as much debt.
Just as there has been no real austerity in the UK, yet‚ there has been no real deleveraging in the global economy at an aggregate level. Paul Marson of Lombard Odier points out that global credit market debt stands at $220 trillion, having grown by 11% annually since 2002, versus 8% nominal GDP growth:
In debt markets we are seeing a catastrophic example of the law of diminishing returns. As Marson makes clear, it takes greater amounts of debt to have the same marginal impact on GDP. The marginal effectiveness of debt has collapsed during the period since the end of the Second World War.
For the USA, for example, 1 unit of debt generated 0.63 units of GDP between 1953 and 1984; that same 1 unit of debt generated 0.24 units of GDP between 1985 and 2000; since 2000, 1 unit of debt has generated just 0.08 units of GDP.
The problem is insuperable. More debt has been created in the past forty years than will ever realistically be paid back… which leads us to the existential financial problem of our time:
The modern, debt-based economy requires constant economic expansion if only to service all that debt. So what happens when the modern economy goes ex-growth and stops expanding?
Iceland already found out. Greece is in the process of discovering. But we will all get a chance to participate in this lesson.
Runaway fiscal and monetary stimulus throughout the western economies is in the process of destroying the concept of creditworthiness at the centre of the modern monetary system. Private investors, we suspect, have little or no conception of the extent to which the state is now the predominant player in the financial markets.
Central banks control the money supply and interest rates. Central banking and commercial banking interests have essentially become fused.
The ECB’s long-term refinancing operations are banking bailouts by the back door. Central banks are now also the swing players in government bond markets which directly influences the price for corporate credit. Central bank monetary stimulus also directly influences equity market direction and confidence.
Be careful, be very careful about the sort of government debt you hold. You may well end up being paid in whole- but in such depreciated terms that being “kept whole” will be meaningless in real terms.
In all other respects, our investment choices remain what they have always been: high quality, high yielding defensive equities; uncorrelated systematic trend-following funds; gold, silver, and gold and silver mining companies.
There will come a point, and it may admittedly be some time in coming, when a major government bond market goes bang. Perhaps Japan, some peripheral market in the euro zone, some core market in the euro zone, the UK, or even the US.
You will hear the echo throughout the world. We intend to be a very long way away when that time comes.
