Damned if you cut spending, damned if you don’t

I met London’s mayor, Boris Johnson, at a City lunch the other day. We had a brief chat about the darkening outlook for the economy. His big worry was that the mood in the country would turn very rapidly from people worrying about “Labour overspending” and its consequences, into everyone blaming any slump on “Tory cuts”. He’s right to be worried. The austerity brigade will be blamed for the next downturn, regardless.

Why’s that? Because the ‘spend now, cut later’ mob are in an enviable position. You see, it doesn’t matter how much you spend. If your stimulus or your money printing doesn’t work, and the economy heads into recession, then it’s because ‘you didn’t do enough’. So you just have to ‘prime the pump’ harder next time. Whereas if you cut spending, and the economy doesn’t instantly recover, then clearly it’s the spending cuts that have caused the problem.

This is why Dylan Grice at Société Générale is right to be sceptical as to whether our coalition government can stick to its guns. People happily talk tough when times don’t seem too bad – or when the austerity applies to others. But when a slowdown, or worse still, a double-dip comes knocking, and house and stock prices tumble again, how easy will it be for David Cameron and the Lib Dems to defend their cuts in the face of popular angst?

Of course, the government doesn’t need to spend itself. The Bank of England can always print more money – using monetary policy rather than fiscal policy. The purpose of this, as Andy Lees at UBS put it so well recently, “is to lift asset prices and therefore strengthen people’s effective balance sheets and thereby increase spending”.

But just think about that for a moment. There’s a terrible circularity to all this.

Too much spending based on over-blown asset prices is what got us into this mess in the first place. Surely we should be allowing prices to fall to levels where people with savings will buy them willingly, rather than trying to keep them pumped up by robbing those savers through the back door?

There’s a great quote – you’ve probably read it – in John Maynard Keynes’s The Economic Consequences of the Peace. He notes how inflation undermines society, because “all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery”.

But this doesn’t just apply to consumer price inflation. If as an investor you don’t know where and when the next hit of printed money will come flooding in, then how can you make sensible investment decisions? We look at the problem here: How to protect your wealth as the recovery stalls. But one thing we can say: more money printing won’t stop the downturn. It’ll just drag it out.


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