Politically, the fall of Mario Draghi’s technocrat government in Italy over the summer after it failed to deal with the cost-of-living crisis, now to be replaced by a far-right coalition led by Georgia Meloni of the Brothers of Italy Party, widely described as neo-Fascist, is sure to create unease among western governments both in NATO and the EU.
But alongside national energy policies which are being re-written on the hoof, nowhere is this more apparent than in economics as governments and central banks struggle to know whether to ride the boom-bust tiger, to anaesthetise it and tame it, or to prod it with a big stick and make it even more angry. These are not merely challenging times, to borrow a hackneyed phrase: they are downright bizarre. For students of rational economics brought up on the theories of Milton Friedman and John Maynard Keynes, or the philosophies of EF Schumacher and others, the policy responses of today will not be found among the conventional textbooks of our youth. What we have today is the economics of the surreal.
Adding significantly to the economic confusion is a populist plethora of direct government interventions in markets and sectors. All create further new tensions. Interestingly, it matters not what each government’s purported political persuasion or colour is, they’re all at it. Take three examples: here in the UK, ostensibly centre-right Liz Truss, the alleged heir to Thatcher, has just unveiled the UK’s biggest welfare package in history and has ‘nationalised’ the price of electricity and gas; in Germany, Olaf Scholtz’s middle-of-the-road coalition has not merely bailed out but nationalised the country’s biggest gas importer, Uniper, while simultaneously launching its own welfare package to deal with energy bills totalling €65bn (on top of the €30bn programmes announced in March) as the Bundesbank forecasts inflation topping 10% and a looming recession; in Scotland, the left-wing SNP administration increasingly in thrall to its coalition partner, has directly intervened in the domestic property market, compulsorily freezing all private and council rents for 6 months and abolishing the ability of landlords to evict tenants, even those who are delinquent. Just as the central banks have found unravelling quantitative easing a far from painless job, so removing these government-built pit-props will not be achieved without difficulty.
The economy is already measurably slowing by central bank design (verging on recession, if not already there and predicted by the Bank of England to last possibly for five quarters) but funding costs as measured by the interest rate and government bond yields have still not peaked. As previously proposed tax rises are either shelved or reversed and short-term government revenues come under pressure to the tune of £30bn a year, at the same time government expenditure is rocketing. Already announced are the household and business relief packages to deal with energy bills totalling an estimated £175bn (you don’t get ‘owt for nowt’, you will still pay, the liability is merely delayed and spread); add to that yet more money for the NHS, that voracious consumer of cash and always hungry for more.
In the absence of any restraint on public expenditure, the stress in the system is the national debt. Already close to 100% of GDP, this ratio will accelerate quickly beyond as the numerator (debt) expands and the denominator (the size of the economy) shrinks in the near-term. And while the nominal debt is rising, simultaneously the cost of servicing it is rising too, not by percentage points but in multiples. Two years ago, the cost of the Treasury’s borrowing as measured by the yield on the UK 10-Year Gilt (government debt) was 0.1%; today it is 3.82%.
As concerns rise about western economic prospects and the lack of coherent policy, the perception of increasing risk is recognised in rising yields. We have discussed the UK Gilt. In the US, the 2-Year US government bond yield has broken through 4.3% while the 30-Year, rising too, lags behind at 3.67%; that ‘inversion’ is an indicator of investors’ worry that the near-term cost to the economy of an aggressive interest rate policy applied to a level of national debt standing at nearly 140% of GDP is sufficient to run the economy off the rails (technically the US is already in recession having suffered two consecutive quarters of decline). In the eurozone, Germany’s 10-Year sovereign bond broke through 2%, to stand today at 2.11% its highest level since 2011 (it was negative as recently as March this year).
The corollary of rising bond yields is falling prices. Were it not so serious, it would be endearing that regulators, and notably the UK Pensions Regulator, still have this fond belief that bonds are a haven of tranquillity and relative calm. The UK 15-Year Gilt Index is down 41.5% year-to-date. Calm? Really?
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