There was an old Soviet joke. The telephone rings at Cosmonaut Yuri Gagarin’s house and is answered by his daughter. She explains that her father is currently orbiting the earth but is due back at 7.00 pm. Her mother is also out but as she has gone shopping for groceries, it’s impossible to say when she might return. To those still the right side of middle age, the irony here was that the Soviet Union could launch the first man into space but its command economy resulted in endemic shortages and queues for life’s essentials.
Current economic policy has its share of ironies too. Three years after the experiment with Quantitative Easing (QE1) began, the Bank of England has finally caught up with Cunard by launching QE3. To date, a total £375bn has been injected to stimulate the UK economy. But, where did this money come from and when politicians and central bankers talk about ‘monetary injections’, what exactly do they mean? I was asked both questions by my 13 year old and after explaining it, he paused and said “Mmmm …… it sounds like they’ve magiced it out of thin air.” I was, of course, immensely proud. Not only did he possess some commonsense but careers in politics or mainstream economics were already a non-starter.
We were surprised to see David Cameron launch an initiative to get first time buyers on the property ladder. The NewBuy scheme will utilise £1bn of taxpayers’ funds to guarantee loans for new build homes up to a value of £500,000 and will enable prospective purchasers to deposit just 5% of the purchase price. Mmmm …… have we not been here before? After a credit contraction resulting from banks accepting too little security, the government now embarks on a madcap scheme artificially to inflate homebuyers’ purchasing power; again. It would be more sensible for Tesco to employ Antony Worrall Thompson as a store detective but if the government wants more affordable housing, here’s a radical suggestion; do nothing and let prices fall to a level prospective purchasers can pay.
The government is also considering issuing debt that will not be repaid for 100 years. While the duration of its debt varies, the average on the present £1 trillion debt mountain amounts to approximately 14 years. George Osborne described this potential action as “locking in the benefits of Britain’s safe haven status for future generations”. Mmmm …… that might be true for the borrower but what about the lenders? The enemy of long term conventional bonds is inflation and since the Titanic sank, the price level has risen by at least 60 times. Alternatively, if that were to be repeated over the next 100 years, the real value of £100 lent now would be less than 2p in 2112.
There’s very little in life that you (or your descendants) can take a 100 year view on; post credit crunch even interest free credit from out of town sofa retailers no longer lasts that long. However, with bond yields already artificially suppressed via QE, our thoughts can be condensed into just two words; caveat emptor.
John Newsome can be contacted on: 01423 705123 or email: john.newsome@williams-im.com
