Spend Spend Spend – Please!

By Justin Urquhart Stewart 16:57 21- Nov -2008

And so the cry goes up – “tax cuts – give them the money and they will spend our way out of this recession”. Oh the power of popular mantra.

With all of the forward thinking of an excited Tigger on speed, the politicians of the world seem wide eyed with excitement in the hope that they have found the answer to economic alchemy and the end to our economic recession. All you have to do is give the plebs some of their tax back and they will go out and spend it on shiny trinkets and electronic dobbins, with the result being just enough to spark a national recovery in our economy with greater sales revenue, more sales tax, rising company profits, more employment, and save the Pound. So that’s done then – well maybe not.

Merely giving money back to people does not automatically result in spending. If consumers are nervous, they are far more likely to sit on their hands. After all, look at the Japanese who were prolific consumers in the 1980’s, only to become professional misers in the 1990’s. They saved and didn’t spend and certainly this was one of the reasons that their economy was so sluggish for so many years.

Although I can understand the concept of trying to reignite the failing fires of the economy, the actions of just throwing monetary incentives at the problem is unlikely to solve it. Flicking matches at a damp bonfire achieves little and just wastes rather useful matches.

The recovery to any economy will be based on two words – trust and confidence. If consumers feel more confident then they are more likely to spend; if consumers are more nervous then they are more likely to first pay down their debts and then start saving. The latter action is of course generally far more laudable, especially for the longer term financial security of the individual.

Following on from this, one area that annoys me with all the major political parties has been their blinkered view of consumer expenditure, debt and savings. All our leaders seem to have encouraged us to go out and spend; after all doesn’t that help the economy? Then to add to it – they also encouraged us to go out and then borrow to spend. The other side of this is also that they have done little to encourage significant consumer savings in a co-ordinated way. Platitudes about meaningful saving for the future achieve little when pension benefits are reduced by the government. Marginal value ISAs and tinkering with toddlers’ trust funds do very little to help, and then with many traditional pension structures discredited in many users eyes, it is hardly surprising that many employed people have little interest in significant saving.

Sir Martin Jacomb, one of the most highly respected grandees of the City, pointed out the risks of ignoring savings in the FT last week, “In the past 10 years, outstanding mortgage debt has increased from £450bn to £1200bn, while consumer indebtedness has risen from £100bn to more than £230bn, making the UK population the most highly indebted in Europe.

Most of this has been financed by credit markets fed by the savings of the workers in Asia.”

This is obviously not sustainable.

I am not going to pontificate on the potential contents of the Pre-Budget Report as I am much more interested in the actual output rather than the speculation of its possible content, however I can only suppose that it will follow the comments and warm words made at the G20 meeting. As I have mentioned before, this meeting was never going to be another Bretton Woods agreement in a weekend, but it is a clear and historical marker of economic changes. By the time the statements have been translated into all our various tongues we will be left with well intentioned platitudes and economic dogma, but this is to ignore the importance of such an event. This inaugural G20 meeting effectively highlights the transfer of influence, if not actual power, away from those older 20th Century powers to those of the 21st Century – i.e. those with the surpluses not the deficits. This is only the beginning of a new order.

To help restore some economic balance, it is in the interest of these nations to keep the money circulating, not because they have a duty of care to those nations reckless enough to blow their assets, but rather that they too will benefit from a growing world economy – and potentially also suffer if it shrinks. China, Germany and Japan all have such surpluses and along with the Sovereign Wealth Funds of the Middle East and South East Asia, this can provide some powerful firepower for a recovery.

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My colleague Peter Sleep found a great quote from a US commentator about inflation –

“Not 6 months ago central banks were fighting inflation. Now, like corner men fanning towels over a wobbly fighter, they are trying to revive it”.

Last week the fussing went from inflation to deflation and a realisation that this switchback ride of pricing is tipping back the other way. Deflation in a debt ridden economy is an evil virus that we want to do all that we can to avoid. Economic Lemsip will be the order of the day. However, let us also remember that with so much money and paper being printed and pumped into the system, that a couple of years out from here we could be seeing another inflation spike – welcome to the VILE decade – volatile inflation and lower earnings.

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Last week’s announcement made by the directors of UBS and Barclays that they were not going to be getting a bonus should hardly be greeted with much applause. How on earth could they justify any bonus, let alone some of their pay levels, having destroyed their share value by 84% and 82% respectively. I see no reason to be appreciative.

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And finally............more excellent value from our local authorities as I see that Kent County Council has spent £15,000 on a video showing viewers how to cross the road.

Can’t they remember Dave Prowse and the Green Cross Code? – surely anyone capable of playing Darth Vader is a better teacher and that it has already been filmed.

Have a good weekend,

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited