The Daily Telegraph - 26.08.2019

O

ver the weekend in the

swish, though somewhat

faded, French seaside

resort of Biarritz, the

leaders of the G7 leading

countries have been

lavishing their attention on a wide

range of subjects. Actually, as far as

economic matters are concerned, the

deliberations of their central banking

colleagues, meeting last week at the

fashionable mountain resort of

Jackson Hole in Wyoming were

probably more bracing.

Among other things, they will have

pondered the balance between

monetary and fiscal policy. They have

picked up the drumbeats in favour of

higher government spending and

borrowing. Indeed, some of the

attendees have been the ones beating

the drums.

If you find this puzzling, you can

readily be forgiven. After all, it is not

that long ago that governments were

desperately trying to reduce their

borrowing to halt and then reverse the

apparently inexorable rise in

government debt. What has changed?

Given all that past effort, can it

now be appropriate to loosen the

purse strings?

There are three major factors

behind the heightened support for

fiscal expansion. First, it has become

evident that the world economy has

slowed considerably and there is

apparently a serious risk of recession.

Someone, somewhere, needs to

spend more.

In several countries, consumers

have kept the economy afloat, but they

cannot be expected to keep doing this

ad infinitum. Meanwhile, despite such

low interest rates, companies are

reluctant to invest. If households and

companies won’t increase their

spending even though this is in their

collective self-interest then there is a

clear case for governments to step in.

Second, given the private sector’s

reluctance to spend, policy loosening

by central banks – taking interest rates

to even lower levels, including in some

cases making them even more

negative, and reviving or increasing

programmes to buy government

bonds (quantitative easing) – does not

promise much of a boost to overall

spending by firms and households.

Third, the costs of borrowing have

The case for higher borrowing

is now clear, but spend wisely

Sajid Javid, the

new Chancellor,

looks to be one of

the few lucky

incumbents of

No 11, with the

borrowing

numbers low and

at the time when

the markets are

making it cheap to

obtain funding,

just when the

economy needs

him to loosen the

purse strings

PA

roger

bootle

gegg r

tttle

A

t the start of this summer,
Facebook invited me to
the old San Francisco
Mint, a building that
symbolised the original
California Gold Rush, for
an early look at the company’s plans to
enter the world of finance.
It had been rumoured for months
that the social network was planning
its own cryptocurrency – digital-only
money designed to rival pounds and
dollars as a means of exchange. But the
plan that David Marcus, Facebook’s
crypto chief, laid out was not what
many had been expecting.
While Libra, as the cryptocurrency
will be called, has been designed and
spearheaded by a small group of
Facebook employees, and it will be
accepted as a method of payment
within its apps, Marcus insisted that
Facebook would not be in charge of it.
Instead, Libra would be governed
by a consortium
of 28 companies
and financial
charities,
including Visa,
Mastercard and
PayPal, all with an
equal say.
The second
point Facebook
wanted to press
home was that it
was taking the
responsible route with the launch. The
company had engaged with financial
regulators including Mark Carney, the
Bank of England Governor, on its
plans, would be fully licensed before it
thinks about launching, and would be
careful stewards of people’s money:
the real-world currencies that back
Libra’s value would be governed and
saved in neutral Switzerland.
“Move fast and break things”, an old
Facebook mantra, has haunted the
increasingly scandal-gripped company
in recent years, and it wanted to show
that it did not apply to storing people’s
money. To that end, the Libra
Association had put together a list of

‘Several

central bank

chiefs

expressed

fears Libra

would prove

disruptive’

Facebook

risks losing

its currency

as Libra

snags mount

James

Titcomb

es

mmb

lengthy and technical white papers

and governance systems.

It took less than 24 hours for

Facebook’s carefully laid plans to start

cracking. Several central bank chiefs,

including Carney, expressed fears that

Libra would prove disruptive to

financial stability or help enable fraud.

In Washington, where distrust of

Facebook is a rare bipartisan cause, US

politicians demanded that Facebook

freeze its plans. It emerged that India,

Facebook’s biggest market and one

that could benefit from digitising

money, was not part of its plans due to

a national ban on cryptocurrencies.

Facebook, to be fair, has never said

that it expected Libra to be easy. It

announced the plans in June but does

not expect Libra to launch until next

year, during which it hoped it could

iron out any kinks, secure regulatory

approval and expand the Libra

Association to some 100 members. But

if anything, the project appears to have

gone into reverse with last week news

emerging that the European

Commission was investigating Libra

on anticompetitive grounds.

Facebook should have anticipated a

degree of scepticism from both

financial regulators and politicians.

Central bankers have never warmed to

the idea of cryptocurrencies, which by

their nature are built to bypass the

traditional money supply.

Meanwhile, a series of privacy

mishaps, anticompetitive tactics and

political rows mean any attempt to

expand into new areas starts off on the

back foot. But the company probably

did not expect to have so little support

from the partners with whom it is

meant to be launching its currency.

Last week, reports emerged that

several of the Libra Association

members are seeking to distance

themselves from the project.

For those who have followed

Facebook’s plans closely, this did not

come as much of a surprise. Besides

Facebook, other members have only

expressed half-hearted support for the

project. Privately, several briefed that

joining Libra was more of an exercise

in intelligence gathering than a sign

they were committed to the digital

currency. And tellingly, no new

companies have joined the association

since it was announced.

Nonetheless, it is a blow. Libra has

the opposite problem to most

cryptocurrencies – that there is

nobody in charge to ensure financial

stability and stop criminal activity on

its network. Libra’s issue is that it looks

like only one party is in charge.

Facebook’s Marcus has tried to

correct this perception, such as by

saying the company will not be in

charge of vetting the digital wallet

providers that store users’ Libra coins.

However, this has only opened the

project up to traditional criticisms of

cryptocurrencies: that they lack the

in-built fraud protections.

As things stand, the prospects of

Facebook being able to stick to its

original timeline of a launch in the first

half of next year seem ambitious. At

this rate, we may ask whether it will be

released at all.

plunged. In several major countries

governments can now borrow at

negative interest rates, effectively

meaning that the markets are paying

them to take their money.

On the face of it, this makes a

powerful case for fiscal expansion.

What could possibly stand against it?

The key argument is that although

borrowing costs may be low now, they

are not bound to remain so in future.

Any new debt issued will at some

stage have to be refinanced. Moreover,

the higher the stock of government

debt the more anxious markets are

likely to be about higher inflation or

even default. Accordingly, increasing

the debt total now intensifies the risk

that the refinancing, not just of the

new debt but of all existing debt, will

occur at higher interest rates.

The upshot is that although

borrowing costs are incredibly low

and in some cases negative, this does

not give governments carte blanche to

spend and borrow willy nilly. They

must get value for taking extra risk

with the public finances.

In the past, when there has been a

need for fiscal stringency, the

clampdown has occurred pretty much

across the board. There is a real risk

now that any relaxation will also occur

across the board. Yet splurging money

indiscriminately across the public

sector would be extremely wasteful.

There are two major areas where

most Western governments may

usefully look to profitably employ the

money provided by higher borrowing:

public investment, especially on

infrastructure projects; and reductions

in the general level of taxation.

Mind you, there are some major

differences between countries. Italy

and Japan are fiscally challenged.

More importantly, in the wake of

President Trump’s earlier expansion,

the US fiscal deficit is set to be almost

5pc of GDP this year and the debt ratio,

which is already 83pc, is rising.

Similarly, France will run a deficit

this year of more than 3pc and the debt

ratio is close to 90pc. In these

countries, the scope for fiscal

relaxation is limited.

Germany is at the opposite extreme.

It is running a budget surplus of over

1pc and its debt ratio is below 60pc.

Moreover, German infrastructure is

pretty old and ropey. So there is a clear

economic case for a substantial fiscal

relaxation, focused on infrastructure

spending. But the German

government, backed up by much of

the German public, seems to have a

fixation about deficits and debt which

goes beyond the rational. Prof

Sigmund Freud would surely have had

some interesting things to say about

the causes.

The UK is in an intermediate

position. Thanks to previous austerity,

combined with continued modest

economic growth, the fiscal deficit is

now down to about 1pc of GDP, while

the debt ratio is now about 82pc, down

from a peak of 86pc. Britain’s new

government is keen to revivify the

economy and boost its standing with

the electorate. And all this at a time

when it looks increasingly likely that

the country will have left the EU by

the end of October, quite possibly

without a deal. This may well merit a

boost to aggregate demand.

A radical programme of tax reform,

simplification and reduction would

go some way towards achieving

this objective.

Sajid Javid, the new Chancellor,

looks to be one of the few lucky

inhabitants of No 11. At just the time

that the economy needs him to loosen

the purse strings, the borrowing

numbers are reasonably low and the

markets are making it cheap to borrow

more. This gives him the opportunity

to be a popular Chancellor by taxing

less and spending more. Nevertheless,

there are still limits. To be a great

Chancellor he must spend wisely.

Roger Bootle is chairman

of Capital Economics

[email protected]

‘There is apparently a

serious risk of recession.

Someone, somewhere,

needs to spend more’

‘AOL and eBay were

challengers once. The risk

of overpaying for the next

big thing is very real’

Business comment

The four winds of change

that investors must heed

I

t’s human nature to overemphasise

the here and now, to focus on the

news agenda and to extrapolate the

recent past. When it comes to our

investments, however, it pays to take a

longer view. The zigs and zags of the

market are irrelevant – what matters is

the underlying direction of travel.

Here, then, are four mega-trends that I

believe will shape markets over the

next ten years.

The first has been brewing for some

time and is perhaps the trend that we

can be most certain of: the retreat of

globalisation and the rise of a more

regionalised, protectionist and

populist world. This matters to

investors because it draws a line under

the past 40 years or so, during which

markets have prospered, albeit with

some nasty air-pockets along the way.

Even if Donald Trump is not

re-elected next year (which I imagine

he will be), he has struck such a chord

with middle America that any viable

opposition will have to ape his

nationalist rhetoric. The populism may

come in different flavours, Left or

Right, but it will be much the same

thing. Great power-driven geo-

politics, more regionalised trade,

probably the end of a unified, seamless

worldwide web, less freedom of

movement of people and capital. The

myth that globalisation was an

inevitable force of nature will be

exposed – it was always a political

choice and those can be reversed.

As an aside, this is why Brexit is

such a rash experiment. You don’t

have to believe that Britain needs to be

tied into a political project to know

that we will be better off closely

aligned with a continental economic

bloc that can compete in an

increasingly regionalised world, no

longer governed by a rules-based

global order. Europe and the US must

work together to take on the challenge

posed by Russia and China. Global

Britain only makes sense in a global

world order – and that is disappearing.

The second trend could be a

consequence of this more

compartmentalised, populist world.

Inflation does not feel like an issue

today. But if governments finally step

up to the plate and accept that fiscal

stimulus needs to pick up the baton

from the central banks’ exhausted

monetary injections, then spending

and borrowing could rise sharply in

the years ahead.

Just as political barriers are being

thrown up around the world,

technology will tear down protective

walls within economies. This

disruption is the third mega-trend and

it is the hardest to play as an investor.

We have already seen the early stages

of this process as the potential of the

high-powered computers we all carry

in our pockets has changed the rules

of the game for a handful of specific

industries such as hotels, taxis,

restaurants and retail.

However, this process has barely

scratched the surface. Just think how

our physical infrastructure has been

developed to support a pre-digital

world that no longer exists – our

railways, high streets, bank branch

networks. Much of this might end up

redundant in the world we are

creating. All this assumes that the

disrupters will replace incumbents

and become the new establishment,

but increasingly we need to think

about who will disrupt the disrupters.

AOL and eBay were challengers once.

The risk of overpaying for the next big

thing is very real in a world where the

business life cycle is vanishingly short.

As if this investment backdrop were

not challenging enough, the rules of

the game are changing even more

profoundly in one final arena. The

admission by America’s influential

Business Roundtable group that

promoting shareholder interests is no

longer the central purpose of

companies is a revolutionary idea

whose time has come. Under pressure

from activists and investors alike,

companies have accepted that

considering environmental, social and

governance factors is not just the right

thing to do but good business too.

Climate change represents a huge

threat and opportunity to companies

around the world. We have reached a

tipping point. First, because the

argument has been won.

Environmentalism is no longer a

fringe belief but mainstream. So too is

the understanding that human

exploitation is unacceptable.

Sustainability principles are now just

another tool in a financial analyst’s kit.

These mega-trends are not nailed-

down certainties, but I would be

amazed if all four were not key

influences on the direction of markets

over the next five to ten years. They

won’t tell you what to invest in, or

when, but it would seem rash to make

any investment now without testing it

against these four themes.

Tom Stevenson is an investment director

at Fidelity International. The views are

his own. He tweets at @tomstevenson63

Politicians can no longer ignore the forces of environmentalism

tom stevensonnson

DYEGO RODRIGUES

30 ***^ Monday 26 August 2019 The Daily Telegraph

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