By Michael Every of Rabobank
How Now Brüning Cow?
"How now brown cow" is a phrase used in elocution teaching to demonstrate the rounded vowel sound /aʊ/ since at least 1926, but today seen as an archaic greeting or an interrogative expression, one which I like using because Bugs Bunny did too – and he sounds like Janet Yellen. I’d really like to hear her say the phrase given we are in a Looney Tunes policy world right now without any Merry Melodies, and with a distinct 1920s feel to it.
Yesterday, markets celebrated the fiscal U-turn in the UK getting even more ‘U’. 10-year index linked Gilt yields collapsed 63bp at one point, while the nominal 10-year Gilt yield was down a mere 36bp, taking some other global yields with it to a far smaller degree. If it weren’t for the fact that year-to-date the UK 10-year yield had risen from 1% to 4.51% before now sitting around 4%, with most of that having happened before the recent mini-Budget, one might call it a “success” for Chancellor Hunt and PM Liz “this lady is for turning” Truss.
The problem is that for many in the UK, the new fiscal ‘U’ contains an expletive before it and an exclamation point afterwards. Income tax is not going to be cut; corporate tax will rise; spending will be savagely cut; and the government’s unlimited energy guarantee will now only last until April 2023: after that you are on your own with soaring prices. If it is more important to level Gilt yields down for investors than to level people up, why don’t we remove the welfare state and minimum wage, cut civil servant salaries to benchmark private sector salaries lower too, and sell off the army for scrap? That way we can get Gilts down another 350bp, if we follow Japan’s lead.
We’ve tried the Hunt (Osbourne) fiscal austerity path before. We did the same after 2008, while bailing out the financial sector and doing QE to make the rich richer, which the market is also clamouring for again now. It was a disaster that entrenched populism, Brexit, the ‘new normal’, and a hysteresis effect on GDP all responsible for the fact that a developed market now looks and acts like an emerging market. Financial markets are cheering a repeat --even as I suspect post-Hunt opinion polls will continue to point to the Tories disappearing as a political entity, and the UK becoming a de facto one party state under Labour-- because they are looney and know only one tune: “tight fiscal policy, loose monetary policy”. They just aren’t going to get it. They are going to get tight fiscal and monetary policy.
We’ve tried that path before too. After 1929, under Brüning in Weimar Germany. It was the crushing deflation he started in 1930 that drove the rise of Nazism in 1933, not the inflation from 1921-23 led by a supply-side shock (France seizing the Ruhr, alongside unpayable war debts in hard currency with no means to export, and, yes, money printing to fill the gap) we teach as being solely responsible despite happening years 10 years earlier! We teach that so we can justify stupid austerity when rejecting stupid fiscal splurges. I can’t believe I have to point out such basic history to people who talk about inflation and populism for a living, but “how now Brüning cow?”
Markets are cheering this, and the BOE, regardless of this being a disaster with a lag. Even if we don’t see worse populism --and despite ECB market action ‘helping’ get rid of Berlusconi in the past, Italy has since ended up with Meloni-- the UK will see collapsing tax revenues and larger deficits anyway. Firms will fail. Unemployment will soar. GDP will shrink. Everyone with half a brain knows this to be true. Then again, no one with half a brain has been anywhere near fiscal policy for years – and I include the IMF in that, not just No. 10 and 11.
Meanwhile, this not a UK issue. Although the fiscal position is not a problem for Australia, the RBA’s latest minutes underlined they are terrified of the impact on mortgage rates/housing, and are selling themselves the lie that global inflation will fall back rapidly: refer to yesterday’s Daily on my view on such ‘models’. However, the Deputy Governor just underlined that while they are lagging other central banks, that “also means that if we increase interest rates at every meeting, we can potentially move much faster than overseas central banks.” So we could see a 100bp RBA move?! I think not, but even the Aussies are realising their old policy tricks no longer work. Then what, hypothetically? Fiscal tightening into a housing slump? Or fiscal loosening and an explosion in bond yields and a collapse in A$? (And nearby, today’s Q3 Kiwi CPI data came in at 2.2% q-o-q vs. 1.5% expected and 7.2% y-o-y vs. 6.5% expected.)
I know these messages are unpopular. I know we want nice easy answers, like ‘cut taxes!’, or ‘cut spending!’, or ‘buy all of the things!’ And I know life is particularly confusing now for Right and Left alike, e.g., Kanye West ranting “Jewish Zionists control the media”, after implying he’s Jewish because African-Americans people are the lost tribes of Israel, then buying Parler, a conservative social media app US liberals already believed was full of Nazis. By the way, this is the kind of conversation that was happening in Weimar, to the embarrassment of its shrinking liberal classes, before Brüning went all in austerity to break the unions, and instead broke European civilisation.
At least the Financial Times is doing some good clarifying work with the latest in a series of columns by Rana Foroohar that echo the greatest hits of this Daily. Today’s is titled ‘Free Trade has not made us free’, and underlines that globalisation didn’t resolve underlying political differences between us; that we are heading to a post-neoliberal world where trade is about values not prices; that means higher inflation; and, as Russell Napier argues while again talking in parallel to our greatest hits, a sustained Western capex boom as industry returns (just maybe not to Europe): look at the destruction about to be wrought in Chinese semiconductors by the latest US measures. The FT continues that most low-income voters will still happily take that trade-off for a few years if it means a better-paid, more rewarding job with greater national resilience.
Of course, the UK government is being cheered for going in completely the opposite direction by markets! Richly remunerated denial always sells better than painful truth.
Perhaps the UK should just have taken a leaf out of China’s book. I don’t mean MMT into the supply side, which is being rejected now. I mean cancelling the publication of economic data for a while. I am 100% sure that this is because the Chinese data due were so outstandingly positive that the government were worried it would overwhelm us with its magnificence. There is no other reason I can think of for why it is now going to be delayed.
If you think I am being particularly flippant today it’s only because, like life, getting policy wrong again against the current geopolitical backdrop presents tail risks too important to be taken seriously. I won’t credit those making such huge errors with a dry, technocratic response. They don’t deserve one, and they won’t get one here. “How now brown cow?”
