Cutting Down The Magic Money Tree

THE CITY GRUMP

In 2008, the central bankers grew the Magic Money Tree, technically known as Quantitative Easing (QE). It is their opioid “gift” to all of us and most of the Western World has been hooked on it ever since. For a while it looked as if we could kick the habit but then along came the pain of the pandemic, brought to us by this year’s Davos star-billing China – and those opioid prescriptions, doubled, trebled in size.

Don’t worry say Boris & Co, take the money from the magic money tree , stay  home and use it to relieve your pain. We know what’s best for you.

But they don’t.

Toxic levels of debt are building up and up in the body politic. The opioid manufacturing central banks say don’t worry , look how we have achieved the nirvana of keeping interest rates negligible and inflation miniscule, the body is coping. But it isn’t and the signs are hiding in plain sight. The longest running warning of these has been asset price inflation as the scramble to move out of increasingly non income producing paper money into tangibles has propelled the price of property, stock markets, artefacts, etc, skyward. My current favourite illustration of such has been the boom in Special Purpose Acquisition Companies (Spacs). Also known as ‘blank cheque’ companies, Spacs are shells designed to take businesses public without going through the rigours of the traditional initial public offering (IPO) process and in 2020 they accounted for $75bn of the $330bn raised in initial public offerings (IPOs) across the world. I’m with Steve Russell of Ruffer Investment Management who sees the current IPO and Spac mania joining the South Sea Bubble as one of the greatest financial follies of all time.

Of course booming asset prices means the haves get richer and the have-nots get poorer and the pandemic has only served to magnify that. Here the Office for National Statistics reports that since the start of Covid, 9 million of us are having to borrow more. All this is enough to give Capitalism a bad name, but the government’s visible solution is to get the opioid manufacturers to step up production.

Not good.

Most Prime Ministers are financial pygmies and the current one is no exception, which is why it is vital to have a Chancellor who knows which way is up. Probably Sunak does. He knows there are only three ways of cutting down the Magic Money Tree, being grow your way out, inflate your way out, or tax your way out. The last of those is fraught with risk as dramatic tax rises could paralyse the economy, so in reality he is left with inflation and growth to play with. If he can somehow let inflation gradually erode the toxicity of the opioid induced debt and at the same time increase real GDP then he gets to keep his job and may even have a shot at becoming PM once Boris eventually blows up.

Inflation is the buffalo of economics, a dangerous and unpredictable beast. So what can Sunak do to encourage growth to chop down that Magic Money Tree?

It is gradually becoming acknowledged that the most at-risk section of our society right now is, roughly speaking, the under twenty-fives. It is these youngsters who are on the frontline of Covid induced unemployment and  sub optimal education and yet it is this grouping that so often possess the energy and spirit to strike out. The blessed Mrs Thatcher fully understood this, which is why we need to bring back into play her most excellent Enterprise Allowance Scheme and indeed just such was suggested last October by Sunak’s predecessor Sajid Javid and the Policy Exchange think tank ( see here)  The original Thatcher scheme  gave a guaranteed weekly income for 12 months to unemployed people who set  up their own business. It was the essence of simplicity and shared responsibility, with anyone wishing to claim money under the scheme being required to produce a basic business plan and find the first £1,000 out of his or her own  funds. As a result of this new programme, 325,000 people across the United Kingdom were supported to set up a new business  for the very first time.

Here now is a real opportunity for some joined up thinking. Combine a new Enterprise Allowance scheme with an improved version of the Government’s Kickstart scheme (firms are given up to £6,400 to employ 16–24-year-olds for 6 months who are on universal credit) and abolish Capital gains tax on investment in small companies (classically defined as those valued at less than £250m) and you have a clear pathway to a whole new generation of dynamic growth companies.  Hello to a re-energised younger generation. Bye bye to the Magic Money Tree.

For if we don’t do such a thing,  then may I draw your attention to an article written by David McWilliams in the Financial times published just under 2 years ago. I quote :

“10 years ago, faced with the real prospect of another Great Depression Mr Bernanke launched QE to avoid mass default. Implicitly, he was underwriting the wealth of his own generation, the baby boomers. Now the division of that wealth has become a key battleground for the next election…..For the purist, capitalism without default is a bit like Catholicism without hell. But we have confession for a reason. Everyone needs absolution. QE was capitalism’s confessional. But what if the day of reckoning was only postponed? What if a policy designed to protect the balance sheets of the wealthy has unleashed forces that may lead to the mass appropriation of those assets in the years ahead?”

Cut down that Magic Money Tree before it poisons us all.

The City Grump has spent some 40 years in the City of London. He started as a stockbroker’s analyst but after some years he decided he was too grumpy to continue with the sell side of things so he moved to the buy side and became a fund manager for the next 20 years, selling his own business in the 1990s. Post the millennium, he found himself in turn chairing a stockbroker, a financial PR company, and an Exchange. He still keeps his hand in, chairing a brace of VCTs and investing personally in startups. The City Grump’s publications are available here.