As I write, the FTSE 100 is trading up about thirty points. Has somebody forgotten to tell the markets about the UK’s debt downgrade?
Of course not. The fact is, we all knew the UK government isn’t AAA-rated. As with any other debt, the person borrowing is what determines the credit rating…
And in this case, it’s a government. There isn’t any one person to take responsibility. It was Churchill that said “democracy is the worst form of government, except for all those other forms that have been tried from time to time”! And this is a rather frightening proof of democracy’s failings. The fact that a new set of politicians periodically step up to take responsibility – or pseudo-responsibility – for our nation’s debt is crazy.
It should be perfectly clear to anyone that, without a personal guarantee, no one, least of all the government, should be able to borrow money. If there’s no responsibility, then there’s no accountability.
Now, we can rant and rave about the shortcomings of our democratic system, but when it comes down to it, we need to be pragmatic. When it comes to your finances, stoicism seems the best philosophical approach.
So let’s see where that gets us…
Why did the FTSE go up?
Ultimately, it seems pretty clear that the government won’t be able to pay its debts – at least not in money that’s worth anything like the same as the stuff it borrowed. The national debt ramps up every year. With baby boomers turning to retirement, public finance initiative projects turning to millstones around our collective necks, and of course, a welfare state creating ever-more needy citizens, the national debt will surely escalate.
It’s a dangerous situation. Compared to the size of our economy, Britain is one of the most heavily indebted countries in the Western world. That’s a fact!
To my mind, quantitative easing (QE) is here to stay – it’s the only way to make the sums work. The minutes of the recent Monetary Policy Committee meeting have just been released, showing that Mervyn King was in favour of more QE. And the incoming chief of the Bank of England is known to be of the same persuasion.
You don’t have to be a great conspiracy theorist to see what’s going on. And that’s the thing. More and more people now see what’s going on. If not through economic erudition, they at least see household bills escalating beyond their ability to pay.
Perversely, I think QE is actually good for the UK’s credit rating. Without it, we would have been downgraded a long time ago. Think about it. This is a rating that says whether or not the UK can pay back its debt. The ability to print sterling clearly makes it more likely that the UK government will meet its obligations.
Let’s not get into the debate about whether receiving dumbed-down money is a good thing. Let’s just say that UK creditors stand a pretty good chance of getting their money back. For us stoics, let’s also bear in mind that, as the Bank of England purchases bonds on the market, this money has to go somewhere. And yes, much of it ends up in stocks and commodities.
QE hurts the value of the pound. But perverse as it may sound, that’s actually good for FTSE. Earnings go up (in nominal sterling terms). Exports go up. Not only that, but with a low pound, our multinational companies are cheaper for foreign investors. As are prime residential Mayfair properties!
The falling pound is good for the FTSE
The point is, we’re living with a flawed system. But as Churchill said, it’s better than any other. Or at least it is for the moment!
Recently, I’ve been talking a lot about our nation’s debt… both privately (household borrowings) and publicly (Osborne’s credit card). The way I see it, we’re accelerating into a great, big debt hole.
Ultimately, the financial system will come crashing down under its own weight of paper promises. But not yet.
For the moment, the explosion in UK borrowing is actually good for the FTSE – and no credit downgrade is going to change that. To balance the books, printing money is almost a requirement. As investors, we must be pragmatic. Stay calm and try to think about where the money flows next.
For sure, we need to keep our eye on the exits. Gold is looking like a very good buy just now. If you have the bottle to buy in when everyone else is losing their nerve, there’s a chance you could do very well.
But over the short-run, I don’t have a great concern about the FTSE. The falling pound is good for it. Today’s rise back towards the 6,400 level is a case in point.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
Your capital is at risk when you invest in shares – you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
The Right Side is an unregulated product published by Fleet Street Publications Ltd.
Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No 115234. http://www.fsa.gov.uk/register/home.do