Editor's letter

Exceptional measures don't come cheap

Rishi Sunak promised so much in his Budget that's its impossible to tot up just how much it will all cost. That is not a good thing, says Merryn Somerset Webb – the long-term effects of overspending are rarely good.

The arrival of coronavirus in China at the beginning of the year represented an immediate supply shock to the global economy (the Chinese stopped producing and exporting). That created its own demand shock (they weren’t buying either – and the rest of us started to get nervous as the virus spread). This was unusual enough – you don’t often get demand and supply shocks at once. But it’s got a lot weirder since. First another supply-shock bomb appeared in the form of the new oil wars. And then, another whopping demand shock (a positive one this time) turned up in the form of massive monetary and fiscal stimulus in the UK. 

On Wednesday, the Bank of England cut interest rates by 0.5% and took various measures to make sure credit keeps flowing. The rate cut is more grandstanding than anything else – and comes with all the usual downsides (bad news for savers and terrible news for pension funds). Cheaper money is also clearly not going to do much to overcome the virus itself, or indeed to persuade consumers to nip to the shops. 

However, the other measures make sense. The key thing is cash. Keeping companies alive (making stuff, providing services and maintaining employment) is about making sure that they have more cash coming in than going out – making loans easier to give and to get is all part of that. So was this emergency bout of monetary policy necessary? Probably – to send the usual “whatever it takes” message to nervous markets if nothing else. Was it ever going to be sufficient to keep us out of recession alone? Absolutely not. 

This brings us to the Budget. On Wednesday, the chancellor, Rishi Sunak, announced an extraordinary package for the support of UK businesses. We look at some of the measures this week, but the real point of them is the same as that of the monetary stimulus – to help firms keep the show on the road until what Sunak keeps telling us are “exceptional circumstances” ease up. 

The problem is that it doesn’t come cheap. We stopped being able to add up the total of Sunak’s promises about half an hour into his Budget. That is not a good thing – the long-term effects of overspending are rarely good. Sunak might be right that these are exceptional circumstances. But, as all ex-chancellors know, once introduced, even exceptional or “temporary” spending is very hard to roll back. The same goes for ex-governors of the Bank of England and loose monetary policy: they all know that cutting is rather easier than raising rates. 

How do you invest into these exceptional circumstances? With some difficulty. This week, we look at the possibilities in the new age of rail. David Stevenson looks at how some of the big trusts I know a lot of you hold (as I do) have held up over the last week. Personal Assets, which we have long held in anticipation of a new financial crisis, has done exactly as it should have and protected our capital. Phew. John Stepek looks at the investment trusts that are currently trading on very large discounts. Some probably should be. Others might be making their way into buy territory. Be ready! Finally, in these increasingly tricky times you need a reliable yield – Max King has some interesting ideas for you.

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