Autus Newsletter » Autumn 2022
If I could talk to the animals
The war in Ukraine and the oil crisis are important factors for many reasons, but a red herring when it comes
to matters concerning the global economy. Inflation is the real problem. Inflation is the by-product of the
industrial scale of money printing enacted during the financial crisis of 2008 and the pandemic more recently.
Inflation might have slumbered away for far longer than expected, but the beast is now awake and hungry.
Traditionally, the primary weapon used to fight inflation is to raise interest rates (to stifle the economy). So, lowering taxes to stimulate the economy (loosening fiscal policy) whilst simultaneously raising interest rates to fight inflation (tightening monetary policy) would be an incredibly bizarre thing to do as they are the antithesis of each other. Yet, this is precisely what the chancellor attempted during the mini (non) budget last week. The resulting strategical 'pushmi-pullyou' tug of war between Truss & Kwateng versus the Bank of England would almost have been comical had it not been so terrifying.
The world looked on in horror as the UK nearly triggered another 2008-style meltdown, and the IMF embarrassingly had to step in to have a quiet 'word' in their ears. Like the Cuban missile crisis, we will probably never really know just how close to the brink we got.
Far from swooping in to save the day, team 'Truss/Kwateng' may have potentially ameliorated a 'cost-of- living' crisis only to trigger a much larger 'mortgage-repayment' crisis.
Modern economists argue that another option is to get the economy growing so the debt can be paid back. And this might have been Liz and Kwasi's plan. Unfortunately, they didn't think to tell anyone!
Some observations about these figures (*source MSCI):
We cover some other issues in our Autumn newsletter, including some of the potential impacts of rising inflation on buy-to-let properties, together with some thoughts about how to determine an appropriate level of cash savings. As always, please do not hesitate to contact us if there’s anything you would like to discuss further.
Traditionally, the primary weapon used to fight inflation is to raise interest rates (to stifle the economy). So, lowering taxes to stimulate the economy (loosening fiscal policy) whilst simultaneously raising interest rates to fight inflation (tightening monetary policy) would be an incredibly bizarre thing to do as they are the antithesis of each other. Yet, this is precisely what the chancellor attempted during the mini (non) budget last week. The resulting strategical 'pushmi-pullyou' tug of war between Truss & Kwateng versus the Bank of England would almost have been comical had it not been so terrifying.
The world looked on in horror as the UK nearly triggered another 2008-style meltdown, and the IMF embarrassingly had to step in to have a quiet 'word' in their ears. Like the Cuban missile crisis, we will probably never really know just how close to the brink we got.
Far from swooping in to save the day, team 'Truss/Kwateng' may have potentially ameliorated a 'cost-of- living' crisis only to trigger a much larger 'mortgage-repayment' crisis.
Sell the sizzle, not the sausage
In 'The Wealth of Nations', eighteenth-century economist Adam Smith wrote, “History shows that once an enormous debt has been incurred by a nation, there are only two ways to solve it: one is to simply declare bankruptcy and repudiate the debt. The other is to inflate the currency and thus to destroy the wealth of the ordinary citizen.”Modern economists argue that another option is to get the economy growing so the debt can be paid back. And this might have been Liz and Kwasi's plan. Unfortunately, they didn't think to tell anyone!
A Historical Perspective
Some observations about these figures (*source MSCI):
- Historical UK inflation has, at times, been significantly higher than today (and could therefore rise further).
- Historical UK interest rates (including mortgage rates) have, at times, been significantly higher than today (and thus could also continue to rise further). The housing market is potentially an area under significant risk.
- Historical global stock market returns have acted more independently of inflation and interest rates than most people probably realise.
We cover some other issues in our Autumn newsletter, including some of the potential impacts of rising inflation on buy-to-let properties, together with some thoughts about how to determine an appropriate level of cash savings. As always, please do not hesitate to contact us if there’s anything you would like to discuss further.
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