Features

Three important events you missed while Parliament squabbled yesterday

While Parliament played Brexit games, some important events passed under the radar, including big spending plans, a little inflation-linked jiggery pokery, and some backtracking by the Bank of England. John Stepek explains what it all means.

Sajid Javid © Simon Dawson/Bloomberg via Getty Images

It was the day that austerity officially ended.

It was the day that the Bank of England said that "no deal" wouldn't be quite as bad as it had previously expected.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

It was the day that a pretty controversial decision was made on a key UK inflation measure that could have a significant effect on everything from pensions to the government's annual interest bill.

And nobody really noticed, because all eyes were on the electioneering...

Advertisement
Advertisement - Article continues below

We're all big spenders now

We'll have more on the political shenanigans in next week's issue of MoneyWeek magazine, once we've got a better view of what's actually going to happen next (sign up now if you don't already subscribe you get your first 12 issues for £12).

But it might be a good idea to catch up on what we all missed yesterday while we were focusing on the drama in Parliament.

Firstly, the chancellor Sajid Javid made some very significant announcements yesterday. Will any of them come into play? That's another matter. But if the Conservative Party does win the next election, public spending will rise sharply.

There's a big "real terms" (ie, after inflation) increase in spending for the NHS. There's more money for schools. Local government, policing and transport are all getting whopping real-terms rises of more than 10% next year. Social care was also tossed £1.5bn, with the promise of fundamental reform to come.

In case the message hadn't got through, "austerity" is definitively over.

Now, you'll read a lot of politically-motivated carping from all sides about this. Some will moan that the "fiscal rules" are being breached as though that's ever stopped any government in the past. Some will complain that the spending promises won't be kept, or that they'll be ineffective.

Advertisement
Advertisement - Article continues below

You'll have your own political bias, and please do feel free to indulge it. But only one thing really matters from an investor's point of view, and that's this: the idea that governments should or will exercise any sort of fiscal restraint is heading out of the window.

If Jeremy Corbyn wins the next election, we'll get a big-spending government. If Boris Johnson wins the next election, we'll get a big-spending government. If anyone else wins the next election, we'll get a big-spending government.

That all in turn points to ongoing financial repression (you can't allow interest rates to rise too far if you need to spend money). There are plenty of mechanisms that can be used to do this from quantitative easing to compulsory bond purchases.

But it points to a world in which you need to protect the real value of your wealth as best you can. At least one way to do that is to own gold.

Who knew? Preparing for something can mitigate its impact

What else happened yesterday? One interesting thing was that the Bank of England came out and said that no-deal Brexit wouldn't be as catastrophic as previously expected.

I mean, don't get me wrong. The Bank still reckons it would be terrible almost on a par with the financial crisis. I'm not trying to suggest for a moment that Mark Carney has turned into a passionate Leave voter.

Advertisement
Advertisement - Article continues below

What's most interesting to me is that the Bank which has always been very clearly and unashamedly pessimistic on Brexit acknowledged that its ever-so-slightly less grim forecast was "the result of the preparations for no deal that have been put in place since November".

Again, I'm not trying to change anyone's mind on how they feel about Brexit. But it's worth acknowledging that, contrary to the impression you might have, both sides have been making mitigation efforts in areas where there's a clear mutual advantage to doing so, and that it has been possible to do so, even in the absence of any grand political agreement.

For example, the Bank's main area of concern is, of course, financial markets. But the eurozone financial authorities are extremely worried about that area too. Hence the potential disaster zone of derivatives market disruption was one of the first issues to be addressed.

We keep hearing about going over a "cliff edge" and "crashing out" and the like. But this is not like flicking a light switch on and off. Co-operation is both possible and likely where there is a clear "win-win".

Playing fast and loose with contracts

Finally, there's the arcane but important issue of the Retail Prices Index (RPI). You can find out all about why this index is constantly presented as being "flawed" in Merryn's evergreen explainer here.

But cutting through the jargon, RPI used to be the official measure of inflation. It's almost always higher than the current "official" measure, the Consumer Price Index (CPI). The thing is, RPI is the measure used by all sorts of official contracts including index-linked gilts.

Advertisement
Advertisement - Article continues below

So it would be cheaper for the government for RPI to be systematically lower.

Yesterday, the government announced its official response to the idea of scrapping RPI. Rather than go for it immediately, the chancellor looked as though he'd kicked it into the long-ish grass. RPI will be overhauled by 2030, or possibly 2025. By "revamp" he basically means it will turn into CPI.

However, this had an immediate effect on those index-linked bonds with a long-term maturity. These bonds are linked to RPI. If RPI is going to be systematically lower, then the payout on these bonds will be lower too. In turn that means they're not worth as much.

Why does this matter, other than to the holders of such debt? Well, again, it's an interesting example of politics suddenly having a major effect on markets.

Investors in these bonds thought that they'd signed up to one measure of inflation. Instead, they have the rug pulled out from under them because what would be a front-page issue on any other day is now an unwelcome distraction.

It's all about erosion of trust. It's intriguing to think that we're moving into an era where the reliability of contracts is diminishing and the possibility of aggressive intervention is rising, just at a time when we also face deteriorating liquidity in an awful lot of markets.

Advertisement
Advertisement - Article continues below

In other words, our money is increasingly trapped and at the mercy of sudden shifts in political tone.

It's just something to think about. Not a very reassuring something, admittedly, but do take it on board next time you're reviewing your portfolio. What's your escape route?

Needless to say, we'll be discussing this a lot more at the MoneyWeek Wealth Summit on 22 November (maybe we'll have had an election by then, who knows?)Book your ticket here now.

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/516758/beyond-the-brexit-talk-the-british-economy-isnt-doing-too-badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Visit/economy/uk-economy/601098/coronavirus-big-brother-widens-his-embrace
UK Economy

Coronavirus: Big Brother widens his embrace

The coronavirus crisis has led to a massive expansion of the state into all areas of daily life. Should we be worried?
4 Apr 2020
Visit/investments/property/601081/three-things-matter-for-the-uk-housing-market-now-and
Property

Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020

Most Popular

Visit/investments/property/601081/three-things-matter-for-the-uk-housing-market-now-and
Property

Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020
Visit/investments/property/601065/what-does-the-coronavirus-crisis-mean-for-uk-house-prices
Property

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020
Visit/investments/commodities/energy/oil/601107/oil-shoots-higher-have-we-seen-the-bottom-for-the-big-oil
Oil

Oil shoots higher – have we seen the bottom for the big oil companies?

Just a few days ago everyone was worried about negative oil prices. Now, the market has turned upwards. John Stepek explains what’s behind the rise an…
3 Apr 2020
Visit/economy/uk-economy/601079/how-the-coronavirus-pandemic-is-killing-cash
UK Economy

How the coronavirus pandemic is killing cash

Covid-19 is making a huge difference to the way we live, work and do business. One of its less obvious effects, says Merryn Somerset Webb, is to accel…
31 Mar 2020