The scariest number in the world

What’s the scariest number in the world?

If you live here in Britain I think it’s thirty-two billion.

Specifically 32.3 billion. And if you want to get really pedantic we should throw a pound sign in there: £32.3 billion.

What is it about that number in particular that sends a shiver down the spine? That’s simple. It’s the UK government deficit in 2018. It also happens to be the smallest deficit for 17 years.

Yes, dear reader, we’re in a world in which £32 billion counts as “small”. The alien, upside-down world of government borrowing and spending. Which is to say, borrowing against your future output (and your children, and your grandchildren) to pay today’s bills.

I bring the figure up with good reason. Wednesday evening saw drama in Parliament. The trends we’ve seen since 2016 seem now to be accelerating – pushing us towards a new vote of some sort, at some point.

Given most of the problems in Westminster stem from the fact that most of the political class didn’t like or agree with the referendum result, I’m not entirely sure how another vote will help. Unless we vote the “right” way.

But we saw far more significant development on Wednesday. Taken in conjunction with the fact an election now looms before us, it could well be pivotal for the future of the country – and in particular your savings.

Chancellor Sajid Javid announced the “end” of austerity. He laid out plans to spend £13.8 billion on health, education and police in the fastest increase in spending for 15 years.

Which leads me back to that scary number. The lowest the deficit reached during the austerity period was £32.3 billion. Let that sink in. I’m guessing it’s heading north from there as the government lays out increasingly ambitious spending plans. After all, austerity is over.

That worries me. If the lowest we could get our yearly borrowing is £32 billion per year… what does that tell you? It tells me that our political and economic system is incompatible with anything close to financial responsibility.

I wonder how old my son will be before he sees a single year of surplus. He’s 18 months old now. Any guesses? Write to me on nick@southbankresearch.com. (While you’re at it, you’re cutting it awfully fine to register for our Boost Your Income Masterclass. It kicks off on Monday. It’s free. But if you want to discover a way of massively increasing your investment income, use this link before it’s too late.)

I reckon he could easily make it to university having seen the government spend more than it collects in every single year of his life. What will the consequence of that be? What kind of world will he graduate to find?

I’ll park that question for a second. Perhaps I’ll come back to it next week. Before that – since every time I write about this subject I get more angry responses than I enjoy – I’ll address an objection. Often people write to me and say, “There’s nothing wrong with the government borrowing to invest and stimulate during the bad years.”

And you know what? Maybe they’re right. I’d argue government isn’t the best institution to know what a “good” investment is, given a government’s goal is to retain power, not make a sound long-term investment. But never mind that for a second. Let’s take on the bigger issue.

The idea that the government should borrow when the economy slows is one of the central tenants of Keynesian economics. Its known as “counter-cyclical” spending. The idea is when the economy booms, the government steps back. When the economy slows, the government steps up, borrows and smooths out the downturn.

It makes sense. And in the “austerity” period lots of people suddenly came out of the woodwork and declared themselves Keynesians, mostly because they opposed the spending cuts for political reasons.

Here’s the problem though. For Keynesian policies to be sustainable, the state needs to run a surplus in the good years. It needs to consolidate and pay down debt. To “save”, if you want to think of it like that. It then has the room to borrow and spend in the bad years.

But that doesn’t happen, does it?

For the anti-austerity position to be intellectually sound, the Keynesians should be calling for restraint now. Just as they should have been in 2006, 2007 and 2008. Austerity should actually happen during the boom years. That leaves room for largess in the downturn.

Instead we get the opposite. When things are good (or at least relatively good), the government spends more than it should. Gordon Brown did this. And now Sajid Javid is going to do the same.

There’s no way to square that circle in my view. We’re seeing history repeat right now. Austerity is over, having never delivered a single year of surplus. And an election is on the cards. Together that’s a dangerous combination. Why? Because we’re now going to witness the depressing spectacle of every political party engaging in an almighty spend-fest.

Labour called the recent spending plans “grubby electioneering”. And I agree with them. Perhaps Labour will fight the coming election on a platform of spending only what you can afford. Perhaps it’ll seek spending discipline and not engage in making enormous uncosted promises.

Perhaps. Or perhaps not. On recent form I’m not holding my breath. But let’s see. We can always hope.

Or you can take matters into your own hands. The pound is already hovering around 34-year lows against the dollar. Gold is soaring in response. Depending on how crazy things get, we could see the pound break down from here. If that happens, you’ll be glad you owned gold. Here’s the best way of getting into the gold market right now.

Until next time,

Nick O’Connor
Publisher, Exponential Investor

Category: Energy

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