by Ashley Clark, Director - Winter 2010/11
In 2010 worrying statements were heard at the TUC Conference such as "general strike", "civil unrest" and "co-ordinated action" all relating to proposed public spending cuts by the Con-Lib Government for public services. September also saw the International Monetary Fund (IMF) issue a warning that growth in global economies will slow towards the end of the year.
It is common knowledge that many western nations, not just the UK, are looking at significant public spending cutbacks as a result of concerns over their credit rating and sovereign debt in general.
Greece needed a €100bn EU/German bailout earlier this year due to lack of confidence in its own ability to repay debt. Struggling to borrow from "the market" and going cap in hand to the IMF or central banks is a position that no other nation wants. Greece has since made sweeping spending cut backs to bolster confidence globally but it has caused widespread unrest and even riots in Athens. Across nations, spending cutbacks will impact on internal economies and therefore, global economies over the next year or two and civil unrest or strike action is almost inevitable.
Low Interest Rates - But Not Forever
Many countries, including the UK, currently have low internal interest rates supposedly trying to stimulate their economies. I suggest this is dangerous in the long term for consumers to rely on and we should all should clear personal debt sooner rather than later. In fact, I suggest, by design, Governments are moving us toward a position of much higher inflation as the only way to “repay” huge public sector debt.
Inflation by Stealth
Many western countries will never be able to afford to repay record debt. By allowing inflation to build by stealth as is happening now, over a longer period this has the effect of devaluing public sector debt without repaying it. The UK is, I believe, a classic example of this. In the UK, the Government has even changed the benchmark measure for inflation from the Retail Prices Index (RPI) to Consumer Prices Index (CPI) with different measurement rules, thus trying to hide the real inflationary increases.
Thatcher - A History Lesson
A classic example of using inflation to Government advantage was in 1980’s Britain. Margaret Thatcher was elected in 1979 taking over at a time again of record public debt, expensive state owned services plus a legacy of successive 1970’s governments borrowing billions and even 'bail out' loans for the UK in 1976, like Greece today, from both the IMF and "The Big Ten”, there were general strikes, the famous ‘winter of discontent’ and more.
The “Iron Lady” cut public spending in the early 1980's by closing or selling off state owned loss making businesses such as steel, ship building and mining causing much civil unrest. She then allowed the economy to overheat with high inflation throughout the 1980’s. In May 1980, inflation in the UK was over 21.9%, effectively devaluing Government debt by over a fifth in just a year without repaying it and in September 1990 inflation was still at 10.9% and interest rates were over 15%. This had a dramatic effect of reducing the real value of gilts (UK government fixed interest bonds/debt) and other public debt over a 10 year period again without ever repaying it. This time, it is not just the UK but a global problem.
Expect High Inflation and High Interest Rates
A history lesson helps us with what is to come and how we should invest.
Expect lower interest rates in the short term to support and stimulate, expect inflation and price rises as economies overheat, then expect dramatic interest rate increases in 5-10 years. In short, do not rely on low interest rates they definitely will disappear, clear down as much debt as you can and look for inflation driven investments to protect your money.
Investments to avoid are cash and fixed interest debt such as Government Bonds. Do look in the short term at corporate bonds.
Good longer term inflation hedge investments are index linked bonds, property and property funds with lower prices now for longer term investors and of course stockmarkets will grow artificially on the back of inflation.
Western markets, whilst volatile today, will grow when economies warm up and then overheat but come out early before the equity bubble bursts, never forget "black Monday" in October 1987 where gearing by bond market speculators had a knock on effect and destroyed world stockmarkets in less than two days.