This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to get this direct to your inbox, every single week, you can sign up here.
I am writing from the United States, and the astounding thing here for anyone from Britain is the extent to which America can follow really irresponsible fiscal policies – and somehow get away with it.
US budgets have always been a fraught issue. There’s the popular adage that the president proposes, but Congress disposes, and it may yet be that Congress will dispose of some of Donald Trump’s tax-cutting plans.
Something will eventually get through. It always does. But while on Wednesday evening it wasn’t clear quite what the final deal would be, the plain fact remains that the US will run a fiscal deficit of around 6 per cent of GDP for the foreseeable future.
In France it was 5.8 per cent, so they are in big trouble too. Some countries seem, on the face of it, to be doing rather better. Thus Japan’s deficit is only 2.5 per cent of GDP, and Italy’s 3.4 per cent. But they both have huge debts from the past. The UK’s national debt is just under 100 per cent of GDP, whereas for Italy it’s 135 per cent, and Japan 260 per cent.
The US gets away with it
This leads to the tough question. How much does all this matter?
US treasury securities, meanwhile, offer a solid return, with the 10-year yield currently 4.3 per cent, well above inflation. And since it is the most liquid bond market in the world, if you do change your mind about your investments, you can get your money out.
Jamie Dimon, chief executive of JPMorgan Chase, is the country’s leading commercial banker, and he has been outspoken about the looming disaster. He has warned of turmoil in the bond markets, about how rising national debt was “a big deal”, that “you are going to see a crack in the bond market. It’s going to happen.”
And there’s the rub. In this sort of situation there are two guidelines. One is that things always take longer to happen than anyone expects, then they come more swiftly. The popular version of this is in Ernest Hemingway’s novel The Sun Also Rises, in which his character Mike Campbell is asked about how he went bankrupt.
The other guide is that there will be a trigger – some big event that makes investors feel they should play safe. That hasn’t yet come along. And who knows, it may not happen for several years, as Dimon suggests.
Whatever you think of Trump’s budget, it will get through and America’s borrowing binge will continue a while yet. That may give a bit of cover for other countries, including the UK, to keep borrowing too.
Need to know
The strongest line of defence for US assets is the “where else do you go?” one, because there really isn’t anywhere obvious.
In theory we should be able to fund our national debt at a lower rate than the US, and for much of the past decade that has been the case. But now we can’t.
The thing I find really fascinating, however, is the timing of all this. It’s back to Jamie Dimon and Ernest Hemingway. My guess, and this may be completely wrong, is the big reckoning is still at least a year away, probably longer.
There will be blips – we are very exposed in the UK. But I think a general market revolt will only occur when investors become aware that inflation in the US is embedded in the 3 per cent to 4 per cent region, and may head back well above 5 per cent. It all takes longer than anyone expects.
The message for investors, as always, is diversification. It always makes sense to spread risk. It also makes sense to remember the magic of compound interest. I would love to be able to give more of a feeling about how the bond markets might end the great government borrowing boom, but here we just have to be humble and acknowledge that the six-month to six-year window of Jamie Dimon is the best we can get.
This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to get this direct to your inbox, every single week, you can sign up here.
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