As school children – I still balk at the annoying Americanism of calling all school pupils “stoodents” – we used to refer to the two parties in the English Civil War, who were known as anti-royalist Roundheads and royalist Cavaliers, as representing the right and repulsive versus the wrong and romantic.
There is a similar division opening up in the US Presidential race. Sure, Vice President Kamala Harris is a fresh face – or at least fresher – and Donald Trump, in last week’s face to face debate, showed himself to be a grumpy old man mired in nonsensical claims and outdated policies. Two somethings don’t make a something else and although as the FT claims Harris leads the Donald in voters’ opinions as to who would make the better steward of the economy, it is hard for anybody of even the most modest financial literacy to miss that she is herself illiterate to a fault.
Harris was once a trial lawyer and is therefore skilled at finding her opponents’ Achilles’ heel and plunging a spear straight in. She went for the jugular – pardon my mixing of metaphors – by hitting out at his personal vanity by questioning the popularity of his rallies which ride on his pathological need for something very close to a personality cult. In doing so, Harris figuratively kept the flies off the bride and, as has been widely reported, Trump failed at any point to ask her the questions which are in urgent need of an answer. It was her democrat predecessor and two-term 42nd President William Jefferson Clinton who is famously associated with the phrase “It’s about the economy, stupid” even though the words themselves were supposedly originated by his election strategist James Carville.
I would hope that Ms Harris is boning up on economics although hope is not a strategy. She has so far talked much about her desires to see social injustice addressed – as has pretty much every politician since time immemorial – and to see tax cuts and all that jazz. She sort of makes all the necessary noises on the military and on foreign policy but there is little sense that she has anything approaching a comprehensive view of the world as it is, and of where she wants to see the United States fit into it.
Is the voters’ choice to be either left wing chaos or right wing chaos? The latest FT-Michigan Ross poll reports 44% of registered voters giving Harris more economic credibility as opposed to only 42% plumping for Trump. Did anybody question the qualification of those polled to give a considered and meaningful answer? Were I to have been asked, and I am supposed to know a little bit about the subject, my reply would have been an emphatic “Don’t know”.
Harris has to my mind so far offered little more than classic playground slogans, not least of all on her claim to wish to introduce legislation banning price gouging. I’m not quite sure what her legal definition of price gouging is going to be, but the very fact that she even brings up the subject tells me more about her than I really want to know. And the one doing the rounds when she is asked to explain what she means by inflation is just downright cringe-worthy.
The margins in the critical swing states are – other than in Minnesota where Harris has a 6 point lead over Trump – all within a rounding error of less than 3%. Although Pennsylvania is thought by many to be the keystone in the final reckoning. As few as 5,000 votes might decide the outcome of the entire election. They have long called Pennsylvania the Keystone State. We shall have to see.
The immigration issue remains high up the voters’ agenda and there is little on that front that commends Harris over Trump. Yes, we know that immigrants will do lots of jobs that “Americans” – whatever that is when it’s at home – choose not to engage in. There has even been a meme doing the rounds that has a chap holding a poster declaring “ 2/3 of Trump’s wives were immigrants proving once again we need immigrants to do jobs Americans won’t do”. The great south to north 21st century migrations are the political challenge of the age, to which there is no actual solution, but voters will continue to favour the side with the best fiction on offer.
My problem remains the downscaling of skills within economies exposed to significant immigrant inflows. This is not a short term problem. It is part of a long and possibly irreversible decline. Capital that has been built up in the Western industrialised economies over the better part of two centuries is being gradually spent. This is not about simple deficit/GDP or debt/GDP but about overall indebtedness – government, industry and households – relative to the gross asset value of the entire economy. There are plenty of little indicators that are overlooked, none as evident as economic growth versus increase in debt. If the deficit for example is running at 6% of GDP, but GDP growth is only 3%, then the missing 3% will have to be financed out of capital.
It’s a little bit like the accounting exercise that looks at a balance sheet and analyses the shifts between long term and short term assets as well as long and short term liabilities. If over time the funds flow analysis points towards long term assets being liquidated in order to meet short term liabilities, the business is on the path to a liquidity bind and to eventual insolvency. It’s not a quiz. Bank credit analysts have been performing this simplest test for many years – and if they haven’t been, they should have – but as far as I can tell the same is not routinely being applied to sovereign finances.
The total net worth of the United Kingdom is estimated to be around £13 trillion. We could now begin an Olympic gymnastics routine in bending and stretching the figures beginning with the national debt, now around £2.5 trillion. The Office for National Statistics reckons the current deficit to be around 4.5% of GDP but GDP is flat. So, in essence we’re spending capital.
But whereas a pensioner subsidising income by digging into capital is a finite exercise with the pensioner hoping not to run out before the final reckoning, the government does not have the luxury. Gross capital formation must exceed gross spending and although I don’t have either the time, the tools or the desire to write an academic paper on the subject, I see the same cashflow bind approaching this country. Not today, not tomorrow, not even the day after but eventually and in due course.
The sharp decline in Germany’s standing is astonishing but is to a large part the result of it having for so long been able to fund its social aspirations through the extraordinary amount of value added that its highly industrialised economy was generating. The implosion in demand – I can think of no other term – from China that has taken German machine tools and has employed them to make the same but cheaper has left the country floundering.
Merkel’s welcome to immigration did help to fill a deficit at the low-skilled, low-paid, low-value added end of the economy, but those jobs were piggybacking off the high-paid, high-skilled and high value-added traditional contributors. This enabled Germany to live with its constitutional ban on governments running a fiscal deficit, the legendary “black zero”. Now the top end is fading and the bottom end growing. The shortfall needs to be refinanced and for that the finance ministry needs to be able to access and borrow from the national asset base.
Here in the UK Chancellor Reeves is trying to perform the magic trick of covering a six foot square hole with a five foot square tarpaulin. Tax the rich! Sorry lass, the rich didn’t get rich by sitting there waiting to be fleeced. Anyhow, was it not Winston Spencer Churchill who noted that trying to tax yourself into prosperity is like standing in a bucket and trying to lift yourself up by the handle? Since the rise of the internet – it is itself only 30 or so years old – entrepreneurs’ needs in terms of geographic location have shifted dramatically. Although most politicians, whether from the right, the left or the centre, remain in denial that their control over business is today not a patch on what it was a generation ago. Capital will take root at where best it can thrive.
It was not Rachel Reeves but former Chancellor Dennis Healey – the one who was going to squeeze property speculators until their pips squeak – who in his Labour Party conference speech on 3rd October 1973 declared, “We shall increase income tax on the better off so that we can help the hundreds of thousands of families now tangled helplessly in the poverty trap by raising the tax threshold and introducing reduced rates of tax for those at the bottom of the ladder. I warn you, there are going to be howls of anguish from the rich. But before you cheer too loudly, let me caution that a lot of you will pay extra taxes too.” That was fifty one years and a few days ago and the situation remains the same although I suspect the indebtedness he refers to is nothing compared to the present.
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