Latest issue of MoneyWeek magazine
Issue 1026, 20 November 2020. Subscribers: read the digital edition here
From Merryn Somerset Webb, MoneyWeek’s editor-in-chief
Now is not the time. That’s what everyone says about sorting out the public finances. They’re right. Of course it isn’t. But just because it isn’t time to do it, doesn’t mean it isn’t time to talk about it. There is a group (supporters of Modern Monetary Theory – MMT) who believe that debt doesn’t matter. If you have your own central bank, they say, you can print as much as you like and just use taxes to slow down the economy if inflation begins to tick uncomfortably high. We don’t buy this – and we don’t think chancellor Rishi Sunak does either.
That’s largely because we know that no one will ever correctly guess when it is time to raise tax (inflation moves fast once it starts – see Turkey). But it’s also because we know that even if a clever academic does guess right, politicians are unlikely to listen. Printing money makes you popular (in the short term at least). Raising taxes does not. Still as William White, the ex-chief economist of the Bank for International Settlements (a remarkably honest international organisation) notes on themarket.ch website, what we do need to see is “clear guidelines from government about how they intend to get debt levels down in the future”.
There are several theoretical ways to do this. You can write it off (we don’t need to discuss this one – the UK has never actually defaulted on its debt). You can do as Sunak appears to be threatening and raise taxes. In this political environment that means taxes on “the rich”; in the UK that appears to mean capital gains tax (CGT). It won’t work, partly for the reasons we lay out in this week's magazine (endless side effects and complication) and partly because it can’t begin to raise enough to touch the sides of a debt-to-GDP ratio that has soared past 100%.
You can aim to grow your way out of the debt, or you can speed things up by trying to create inflation so that the value of your debt falls in real terms (is “inflated away”). But this can’t work if the interest rate on your debt keeps going up to compensate for inflation – so you need a way to keep rates low even as prices rise. Enter financial repression – where the private sector is effectively forced to buy government bonds to keep yields below inflation. We’ve been listening to strategist Russell Napier on this for years and telling you to watch for it. But it looks like it is getting closer. The Bank of England governor and the chancellor have both been talking recently about how we can be “encouraged” to offer our capital to finance post-Covid-19 recovery. I am sure that in our new age of authoritarianism they will find a way. All of this represents a potential long-term transfer of wealth from savers to debtors (and the private sector to the state). You should worry about rising CGT (it isn’t indexed to inflation and so is a huge stealth wealth tax already). But you should worry an awful lot more about being forced to watch your wealth being eaten away as your money is encouraged into what Russell calls the “killing fields of fixed interest” in an age of inflation.
One final thing. We’ve often suggested you hold Japanese equities. Here’s a hint as to why – their long-term resilience. Of the 5,500 companies in the world, 55% are Japanese. This includes the oldest hotel in the world – a hot spring hotel business in Yamanashi, founded in 705. For more, listen to this week’s podcast with Japan expert Peter Tasker. He’s good. I think you will like it.