If deficits don't matter, why do we pay taxes?

3rd Nov '20 by Vsihv

127 comments 2486 reads

Hi All,

I wanted to open up this discussion to hopefully get people's thoughts and learn more from those with more knowledge/expertise on the plumbing of the economic system. Please excuse the facetious title, but one can live in hope!

In particular, it would be great to get ideas on how people are managing their portfolios / personal finances.

To use a cliche, we appear to be living in strange times.

Deficits don't matter

One I struggle with most (consciously avoiding lockdown2.0 - took my views off twitter & to my MP) is the casual attitude of policy makers central banks and citizens to the huge increases in "debt & deficit". I am a fiscal conservative at the best of times, but this is getting seriously crazy no?

Maybe, the reason I find this so difficult is that I studied economics in 2001-2004, when I remember multiple times that one of the issues with interest rates is that they cannot go negative and made outrageous comments like deficits / public sector debt result in crowding out private investment.

The BoE is cancelling UK debt purchased as QE, but when Argentina & Zimbabwe do this, it doesn't end well.

I don't want to be sensationalist and suggest that we are going down the route of hyperinflation (which I understand is a political phenomenon) as much as a monetary phenomenon. However, given the level of our imports & the deficit, do we not need other countries to trust our currency and fiscal management.

I guess the big worry is that the currency is relying on history & limited competition for reserve status. But eventually it will depreciate and we will not be able to fund services like the NHS that rely on machines from abroad.

I hear stories of the difficulties during the 1970s & I expect that deficits & inflation were a large part of the issues that caused the societal & currency issues at the time.

What am I doing / have I done?

Not much to be honest - I am far too confused / uneducated / stupid / scared to call the end of the monetary system / falling empires (understand Ray Dalio is the go to source), but in terms of broad strokes as to how I approach asset allocation:

I always held gold, but I have increased it from 2% to 10%.
From asset allocation, I have reduced to less than 10% (from 25) any allocation to government…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Phuntt

5th Dec '20

Macro, the quality of your links is usually great but surpassed yourself with that Raoul Pal interview. Hugh Hendry with CBD oil in his hair is as wacky as it gets - if I had mates who knew anything about money and we were allowed to go to the pub, I’m going with that guy lol.

UK_Investor_8888

Sir mojomogoz,

I've literally just done the same calculations as you:-

I am buying my (hopefully) dream house next year. I am tonight seriously considering selling my Self Administered Trading ISA, losing the tax shelter, de-risking myself after unbelievably good (44%) gains, and just living the next phase of my life mortgage and debt free without being in hoc to some remote direct debit demanding bank.

I will still have shares held by my businesses where losses are at least softened by tax offsets.

The ISA's can re-inflate over time using spare income.

A secured home that can not be voided away from one, due to error, bad-luck or mishap.

Looking for a Santa Rally to sell in to...

Macro

Phuntt,

Well it is Saturday evening and I hope everyone has a nice bottle of wine with dinner and settles back in a comfortable arm-chair to watch MOTD later.

Really you have to laugh. We have Raoul (in The Caymans) and Hugh (in Saint Barthelemy) - both ex-hedge fund managers & devout capitalists and multi-millionaires. And Hugh is arguing that the banks should let him borrow through loans where he doesn't have to pay back any of the capital during the term and only at the very end - all so that he can employ more Caribbean Plumbers to upgrade more Caribbean villas, so that Hugh can lease them out to more and more rich visitors. And all this to ensure that the mob, newly equipped with pichforks, don't take control of the streets and upset the status quo. Does anyone remember 10 years ago Hugh on Newsnight taking on Joeseph Stiglitz during the Greek Crisis educating him about 'the real world' and arguing for debt forgiveness for Greece?

And then there is "Stumbling and Mumbling" - a true Marxist, an extreemist but never a fanatic - arguing for calm consideration.

You've got to laugh! The world has truly gone upside down .... again.

In times like these I do tend to look see what Martin Wolf (FT) has to say on the matter. Where I am sure the message will be something like: everything will, probably, be allright.

Cheers!

I see it totally differently 8888. There are 5 year fixed mortgages right now at 1.29%, 10 years at 1.99%. In a (possibly) permanent low interest rate world, now or very soon is the time to load up on debt, if you can. Especially if you can fix the interest rate. I said earlier we are selling our house - I’m committing the ultimate investing sin and trying to time the market - sell now, wait and watch. I think prices will come down but even if they don’t I’ve two ways to win the bet. We also could be in a negative interest rate world where me buying a house at 25 basis points on 50% LTV looks like a total bargain to the bank. If it breaks the right way, I will happily sign that mortgage deal.

Who knows right? Either way, my kids are going to need somewhere to live so I’m guessing the renting thing has at best a year before my wife puts the foot down and says enough. Oh shit, just realized I’m trying to time the macro environment, the local house market and my wife’s moods. I’m obviously heading for a divorce...

HHR

6th Dec '20

Thanks for the links Macro I followed them both up.

As I said above I have not studied economics so I sincerely defer to you and the other posters on this thread.

There's lots of questions I have on this topic but please can you (or anyone else) give your opinion on this specific question (apologies In advance I know it's a bit fanciful).

The mumblings blog says that the bond market's confidence is a decisive factor because 'they have skin in the game'. However my concern is that the bond market has given up worrying about long term solvency of government debt because the short term benefits of not rocking the QE boat (large risk free profits) are overwhelming. In this way the bond market is inentivised to sustain the bubble not deflate it. If when we get defaults or haircuts they will have long since made their stash and got out.

If that's happening to some degree I wonder if it's analogous to the noughties when it was assumed that banks would be a front line defence against sub prime borrowers because they 'had skin in the game'. History revealed that in reality the banks put short term competitive pressures (to maximize profits) ahead of long term solvency.

After the credit crunch I seem to recall the bond market was jittery ref solvency and imposed austerity on weak eurozone economies as well as the UK - why aren't we seeing Italian debt yields rising? Why is this debt different to the bank baleout debt?

Please can you shoot me down because then I can move on and stop worrying- thanks!

donald pond

Isn't the bond market totally rigged though with most bonds now being purchased by central banks anyway?

HHR,

I don't have any professional qualifications in economics, either. And I have never worked in the Bond markets. The combination of which is a significant handicap!

- Bond Market: Yes, I can understand that the Bond trading desk in an investment bank is incentivised to play the game and not rock the boat too much. But remember that the Bond market is very diverse (many soverigns & thousands of corporates; primary & secondary markets; durations; credit and debt; default insurance etc) and the traders are highly incentivised through base pay and bonuses - so they are a competitve bunch. Many moving parts => very difficult to "rig".

- Austerity within Eurozone: Austerity is only ever imposed on a population with the agreement of that government. In the case of Greece it was the Greek government working with the so-called 'Troika': the European Central Bank, the European Commission and the IMF. The French & German banks that loaned the money were helped out (by their own Governments to avoid debt crisis creating a wider banking crisis). The debt was in effect transfered to the ECB. The only way the debt level was/is sustainable (even with austerity measures) is for the ECB to buy Greek government bonds and hold the rates down. Same for Italy, Spain, Portugal, Ireland (who never defaulted by imposed austerity on themseleves in exchange for ECB support to get their borrowing rates down to more sustainable levels. Those actions were at the limit of what was politically possible in the period 2008-15. But since then the Europeans have introduced the Stability Facility, and more recently CV-19 has started them on the path to debt mutualisation. Eventually once it becomes politically possible debt mutualisation may start to reduce the individual nations debt levels - but that will require Germany and the 'Frugal Four' (Sweden, Denmark, Netherlands, Austria) to play along. The art of what is politically possible and how that emerges over time is what Hugh Hendry got wrong in 2010 - and what Joseph Stiglitz instinctively understood. Essentially the difference between an Investor who stretched to Economics (Hendry) and an Economist who stretched to Politics (Stiglitz).

- Austerity within the UK: The UK never defaulted, was never close to default. So, why did we have austerity? Political competition needs 'difference' between the offerings. The Conservative Party strategy was to get the debt levels back down quickly. Doing so required cuts in expenditure that caused austerity (and unfortunately caused a double dip recession). But it created an 'economic difference' between the political parties that allowed the Conservatives to win the next election on grounds of 'sound economic management' (2015). In retrospect the austerity was counter-productive and was cancelled once 'Gorgeous George' exited the scene (2016). Would they be stupid enough to repeat George's mistake in the years 2021-23 in order to prepare for an election in 2024? ... Let's hope not!

- Why not to worry: As a Stockopedia subscriber you obviously have some of your wealth placed in risk assets. Risk assets tend to do well in low interest rate environments. Most governments understand that they need to be pro-growth, pro-jobs, even at the expense of some inflation. Recovery might be slow and take a long time but realistically you can access the whole world from a UK investment platform.

Realistically the chances of political instability in the UK (riots, outrageous populists etc) should not be that high as long as sensible, competent actors are in charge?

Gabriela Cherciu

This comment has been moderated

Hilarious Phuntt! +1

My mortgage rate came out @ 1.8% (being "self-employed" / Director / business owner).

The real cheek is how they'll jack the rate to 4.5% in 4.5 years by default.

I had considered this as a way simply to own the same amount in shares, and within my ISAs, i.e. maintain my market exposure.

My thinking is DE-RISK, enjoy my life debt free, own less, risk less in the short term. Be greedy but not too greedy. Cash in some of the amazing profits many of us have made this year. And next year, take a holiday for once. Get the clean electric car and a new bike.

The house one can enjoy and is fixed in value, high in utility, isn't going to disappear, will probably mildly appreciate.

Look at our shares journey this year: What a roller-coaster.

And we can say with considerable certainty that we will see a range of -25% to +50% over the next year, probably twice over, as lockdowns, screw-ups, recessions, bankruptcies and capitalism-restarts and recoveries work their way through the seasons.

Its not going to be a straight line, and who amongst us can time this perfectly and do our day jobs!

I / I think many of us here on Stock, aren't doing boring shares and safety investments. We're taking risks and pursing growth.

PS: Never let a woman control you and God help us deal with their "feelings"!

Macro

"Austerity within the UK: The UK never defaulted, was never close to default. So, why did we have austerity? Political competition needs 'difference' between the offerings. The Conservative Party strategy was to get the debt levels back down quickly. "

To answer your question, as a (c)onservative:-

We did not actually have "austerity".

Austerity is a socialist and media intellectual construct.

The reality is the Governments kept spending and ballooning / inflating their budgets, as the economy (Q.E. and capital values too) inflated.

It may be partially true that the rate of increase in Government spending decelerated and rose at a slower rate, but nevertheless, it was still an increase.

And I strongly agree that The UK was no where near default.

If we had real austerity, we'd all have known about it. We didn't.

What people don't like to talk about is "productivity" particularly the productivity (or value generated) of big business, The Public Sector, and particularly the sacred NHS.

My key gripe with The NHS and parts of Government, is that there is no concept of cost, value, inconvenience to either the end users and wider society, or measurement of time lost.

How can it take 10 months to upgrade a single lane on a roundabout? The Mulberry Harbours of Cherbourg were deployed in 4 days in a war zone.

"Austerity is a socialist and media intellectual construct."

- 1. Go and live in Greece and test out that theory.

- 2. I know businesses in Italy where even 10+ years later they still: sacrifice a portion of pay, holiday entitlement and all management bonuses in a compact between government, unions and employers to avoid further job losses.

George Osborn was widely quoted at the time - and on record in parliament - refering to his policies as "austerity". Janan Ganesh (FT) even wrote a book, "George Osborne - The Austerity Chancellor". George Osborne even admitted years later that his policies were a political choice - to try to preserve the UK's 'AAA' credit rating. It was not until he was sacked and replaced by Phil Hammond that the policies were replaced in favour of growth, productivity improvement and jobs.

7th Dec '20

That's not The UK though and you are referring to "socialist" parts of Europe with dysfunctional economies, corruption, war (cold), and political structures.

Why would I possibly want to give up the stability, beauty and prosperity of England / Great Britain?

Osborne is a figure I immensely dislike. He didn't actually do anything "austerity" like in the scheme of things.

I am afraid we will politely disagree here Macro!

8th Dec '20

Thanks Macro, I do see what you mean about the bond market having a diversity of investment viewpoints. You're right, I am now 85% in equities with the other 15% in gold so I am going to duck out of this thread now and focus on something I actually know something about! Cheers HHR

William K

Ray Dalio on low interest rates, quantitative easing, the threat of inflation and the importance of diversification (22 minutes on Youtube). His portfolio is about 19% gold. He sees the USD devaluing significantly. But he believes that 'printing money' is the only solution for the government to avoid social disintegration - even if has added to the wealth of the wealthiest people in the world (Jeff Bezos is now worth $13 billion more than at the beginning of the Pandemic). Taxation is not the solution to increased government spending - it only makes things worse.

Alphaflight

9th Dec '20

I have a lot of respect for Dalio. Note that Stan Druckenmiller's largest position is now gold (I think 30%). This is the guy with the best all time trading record over the last 4 decades with an average annual rate of return higher than Warren Buffett's.

There is $100 Trillion worth of M2 "money"out there floating around and yet all of the gold mined in human history is valued at only $7 Trillion; Gold still looks cheap to me.

13th Dec '20

Martin Wolf (FT) offers a sensible and re-assuring take on the UKs economic policy outlook - available via his Twitter feed to avoid the FT paywall: https://twitter.com/martinwolf...

"Restoring UK growth is more urgent than cutting public debt - Britain must reassure the world it is in the hands of competent leaders"

Cannot recommend the Market Wizards books highly enough, and you can get them quite cheaply on Audible. The Druckenmiller one is great: he went from short to 130% long on the Friday in October 1987 before the market tanked. A real reminder that even the very best investors make terrible mistakes as part of their learning process.

Right now, hedgeye are bearish on gold. I'm not sure they should be" their methodology is based on Dalio's, and they are calling the current markets as quad 2 (i.e. growth increasing, inflation increasing). I'm not sure that's quite correct: the slowdown in 2020 has imo made any growth now rather artificial in nature as you are comparing against an economy that was hobbled by extraneous events. But it takes 2 to make a market.

14th Dec '20

Growth requires visionary leadership, risk taking entrepreneurs and a motivated work force. Has Britain got what it takes?

Wilconz,

Growth requires many things that the UK has, and some where the UK has been lacking.

Paul Krugman (Economist & Nobel laureate) stated that "Productivity isn't everything, but in the long run it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”

Some countries have managed the factors that make up productivity better than the UK: infrastructure, basic education & numeracy, capital investment, skills etc. In the post war period our lack of productivity growth led to capacity constraints in economic up-turns sooner than other nations and our up-legs were curtailled by the need to control inflation earlier than other nations.

Strategy is an area where the UK track record is mixed. Our current 'predicament' is one where all of our options are measured by how bad they are relative to each other. A nation with strong strategic planning would be faced with a myriad of positive choices - and not negative ones.

At the corporate level the UK has lost control of too many boardrooms. There are Head Quarter level functions (strategy, analysis of trends and market evolution, competor analysis and investment in future core competences and infrastructure) that in too many cases are being performed outside the UK because we sold control of businesses to overseas capital. There is a danger that over time we will have lost the ability to manage large, complex, long lived businesses.

Back in 2016 the government & civil service woke up to the fact that we did not have an industrial strategy - and that the upcoming challenges might need one and quickly. The closest thing that they had to hand was a Science and Innovation Strategy, and this was the basis through evolution into what the UK considers to be an industrial strategy.

But, if you compare where the UK are compared with say, Germany, with their long standing and constantly evolving strategy, currently under Peter Altmaier, then we have a great deal of work to do. And this is a continuous process that has no ending - not traditionally the strength of a UK parliament with a notoriously short attention span.

In the areas of Private Equity / Venture Capital there are cultural forces at work, too. In USA these sources of capital have favoured the selection of 'winner take all' business models - and backed them with the level of funding to succeed globally. In the UK and EU our PE/VC sector have been content with winning a small share of their local markets. So very different 'network effects' at play between California and UK/EU as far as PE/VC is concerned.

In state controlled capitalist systems (e.g. China) or ones dominated by trading houses (e.g. Japan, South Korea) the ability to formulate: strategic planning, focus investment on specific sectors resulting in global dominance of whole 'verticals'.

Yes, we have good businesses leaders and a motivated workforce, and we have risk taking entrepreneurs. But we lack a framework that tilts the chances of long term success in their favour.

Laissez-faire may be a French phrase but it has become a peculiarly British speciality?

Thanks for that solid summation, Macro. I agree with what you say. We do have a problem with laissez-faire in that we have no clear strategy for driving our economy. When I used the term visionary leadership, I meant that the strategy had to come from above, meaning the Prime Minister and the cabinet.

We do, as you say, have fine entrepreneurs and workers. But we lack a shared message of growth. Why are we importing cars, food, and non-essentials from abroad? Why can't we make the best clothes, cars, wine and cheese in the world? Yes, I know it's hard to compete with foreign sweatshops that pay children 25 pence an hour to work in revolting conditions but it shouldn't be impossible. Why do we waste about one third of our food? (etc. etc.)

I would just love to hear our political leaders coming up with ideas and solutions. The US, China, Taiwan, Japan, South Korea and quite a few other places in the Far East have strategies and know how to make things happen and share the vision with their peoples. Our only real hope is that the problems we face with Brexit will force our leaders into engineering change and growth.

If deficits don't matter, why do we pay taxes?

Deficits don't matter

What am I doing / have I done?

Unlock the rest of this article with a 14 day trial

About the Author

Vsihv

127 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...