There ought to be clowns

To borrow from Amber Rudd, he was the life and soul of the party, but not the man you would want to drive you home at the end of the evening. And now it is his turn to be driven out of Downing Street, although, at least until September, figuratively rather than literally. Who’d have foreseen the delightful irony that a man who so freely dodged personal responsibility by skulking behind a shield of florid conceit and misdirection was finally done for by a text-book example of nominative determinism; Pincher by name… Of course, this was just the back-breaking straw that had overloaded the patience of the British electoral camel – or perhaps that’s giving too much credit to those sitting on the Government benches, a majority of whom had pledged their fealty only weeks earlier. More likely it was simply the polls had panicked the herd (to pinch a metaphor from their erstwhile leader’s resignation address).

Whatever the catalyst, it looks as though he’s on the way out. I expect he’ll be fine, there’ll be plenty of demand for him over the pond on the speaking circuit. I was not a little impressed that, from the zillions she is paid for speaking in the States (where she commands $80,000 - $100,000 a pop), Theresa May takes an annual salary of just £85,000, with the remaining profits going to charity. I wonder if her successor will see this as a precedent to follow?

I am pleased he is off. While there were undoubtedly some successes, in my book he was essentially a scheming charlatan who squandered an electoral majority (and his own unquestionable talents) by pursuing a divisive populist agenda. From austerity to Brexit there is much the Tories have done since 2010 that I would rather they hadn’t but that is the nature of democracy. However, the cavalier attitude to treaties (and, by extension, other peoples’ rights), the willingness to not just break rules but to rewrite them when they proved inconvenient, the lack of integrity at the very heart of power were all of themselves new lows that tested the implied covenant between the Government and the governed; the covenant that underpins our democracy. For me the nadir was the deliberate stoking of ‘culture wars’; crude ‘dog whistle’ politics that too often seemed aimed at making some of the most disenfranchised groups in our society feel still more deeply ostracised. To my mind, a responsible government should be seeking to heal rifts in society, not exacerbate and capitalise on them.

Where does this leave us? The tradition in the UK (and, I guess, most other places) is to time tax cuts to coincide with elections on the basis that, while the electorate will protest otherwise, it’s what’s in their wallets that makes the difference. With two elections (one for the leadership, the other for the country) due over the next couple of years and the economy in near-crisis this electoral axiom threatens to be challenged by economic reality – or so you might think. From the announcements over the last weekend it would seem the Tory leadership race has no such qualms, having quickly descended into a Dutch auction, with each new candidate promising to reduce taxes quicker and further.

Of the many ways of looking at economies, I am drawn to a Keynesian approach. This starts with the concept of a balanced economy, where the public sector steps in at times of recession when the private sector is under stress, filling the demand gap and maintaining the means of production. For example, an alternative response to the Global Financial Crisis could have been to massively increase council house building. While not only addressing a social need it would also have kept the brick kilns and block factories working, given firms the security of less volatile demand and meant that when the private property sector recovered we were not confronted with materials shortages as moth-balled manufacturing plants were eased out of hibernation. Instead, we had Austerity, which saw public sector spending squeezed at the exact moment the private sector was at a low which in turn delayed the recovery.

Partly as a response to the pandemic and partly reflecting a policy volte-face, the last couple of years has seen a retreat from the fiscal constraint that characterised the austerity years. As a result, the ratio of debt to GDP has rocketed to close to 100% while the Bank of England’s balance sheet has ballooned as it created the new money to fund this largesse. With the nation’s bank balance so overdrawn you may well think it seems an odd time to be promising tax-cuts. However, it is important to appreciate that it is not the absolute size of the debt that matters, rather it is the proportion of debt to the overall economy. There are two ways of reducing the debt burden – pay some off or grow the economy. Pretty much everyone agrees that the latter is the better route, the differences come around how to achieve this and how much we should be prepared to let the debt increase while we are waiting for the economy to grow.

Sadly, the fine judgement required to get this balance right risks becoming lost in the noise of a group of second-raters scrambling for the attention of a tiny and polarised electorate to become leaders of our nation. It is unlikely cutting corporation tax alone will do the trick, although this seems to be the policy proposal of choice.

It is at uncertain times like this we need to draw comfort from the power of mean reversion. Markets have a habit of sorting things out eventually despite the best efforts of our elected representatives. While concern a few weeks ago centred on runaway inflation, this has given way to fretting about recession, which is in turn leading to a rethink on demand. As a result, although inflation is pushing up towards 10% a barrel of Brent Crude is now trading at around $105, well below its levels of around $120 only a month ago, while UK Natural Gas has more than halved since its March peak – although it is still up around 170% on a year ago so we’re not out of the woods yet.

Recession concerns also mean future central bank tightening (which, in the present cycle, means interest rates hikes rather than reducing money supply) is likely to be less severe than perhaps markets had assumed. As a result, despite the political turmoil, we have seen a modest recovery in most markets since the start of the second half. It is way too soon to call a bottom but it does demonstrate the checks and balances within the global economy – and reaffirms the power of mean reversion!

But where are the clowns?

Send in the clowns

Don't bother

They're here

Richard Ross

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