All the King’s Horses

THE TRADITIONAL MACRO ECONOMIC MODELS OF THE WEST ARE SPLUTTERING. CAN ALL THE KING’S HORSES AND ALL THE KING’S MEN PUT THEM BACK TOGETHER AGAIN?

Markets are such things as dreams are made of, to misquote the Bard. Much of the time, they seem full of apparent meaning (appearances, of course, often being deceptive) whilst sometimes, as now, they are about as fathomable as the North Atlantic in winter or as clear as Bodmin Moor ditches in a heavy mist – as clear as mud, as my father might have put it. We are in the grip of a swirling fog of market uncertainty, in which central bank governors, chairmen, presidents and their directors, along with their courts of high financial and economic experts – all the King’s horses and all the King’s men – cannot put the Humpty Dumpty of the traditional economic model back together again. They have lost all inkling as to what happens next! Is there a comet – that classic, ancient omen of ill luck – in the skies? As Mr Donald Trump might say, “What the hell is going on here?!”

And even his unexpected and unlikely success on the US political stage adds to the sense of mystery, global unease and foreboding. He is the Presidential candidate without policies – except, of course, for that wall he wants to build across the USA where it meets Latino America just south of the border, down Mexico way. Trump even makes you feel a bit sorry for the plight of that rival, hard bitten, Old Testament throw back, Republican presidential candidate Ted Cruz; or even to lament the lost erudition and wisdom of the last President Bush (“the trouble with the French, is that they have not got a word for ‘entrepreneur’!”), who failed to generate new significant support for his brother, Jeb.

Times are indeed weird when even Republicans reject other Republicans for President in favour of the un-Christian – according to a decent Pope – Donald D. Trump.

It is, of course, part of a well understood and universal political alienation of the people from their elected representatives. It is a form of bloodless revolution against that ‘rump’ of establishment politicians in many lands. In a spooky “Omen I” sort of way, one is tempted to ask a parish priest, vicar or parson  with bell book and candle, to enquire whether there is any demonic theological implication in the fact our Donald D. is so curiously named – ‘rump’ with an added “T” for “Terrifying?”

Political rumps seem to be a naturally occurring cancer on the representative body politic, a by-product of “tribal” party politics. It is all very well to elect new representatives; but what happens when the new ones seem too wearyingly like the old redundant ones. Chips off an old block, beans out of the same bag, Disillusion before the storm?

Has representative democracy in the West lost one of its great advantages over tyrannical regimes by making elections appear pointless? Remember Cromwell’s words to that “Rump Parliament” beseeching it to be gone in the name of Christ because “you have sat here too long.”  One supposes that many modern voters sympathise with those sentiments. That is why we have Bernie Sanders, Donald D. Trump, Jeremy Corbyn and Marine Le Pen as contemporary political manifestations. The problem is: what comes after them?

Returning to the modern mystery of macroeconomics, it was only during last December that the US Federal Reserve raised the Fed funds rate by a modest one quarter of one per cent, with learned, insightful economic talk of a further three or four modest increases over the next year, as the US economy gathered the more inflationary maturity of recovery momentum. The old macroeconomic machine appeared – deceptively it now seems – to have returned, like Dr Who’s time zone crossing and intergalactic Metropolitan Police box. Now, scarcely two months later, market commentators seem to doubt the wisdom of raising them in the first place, with even tentative talk of more credit easing. The point being that it is talk based on a nebulous uneasiness which seems to be more hearsay than hard fact. Economic policy custodians are now talking about downside risks, not upside inflationary risks. This is not where we all thought that we would be at the end of last year.

As far as the United States is concerned, the greatest mystery is why much cheaper gasoline and oil prices have not yet stimulated a more positive increase in consumer spending, as it would have done once upon a time, as Americans climbed into those long, chromium, gas guzzling limos to head down the freeway to a shopping mall in the next State. The low cost of oil has hit America’s great oil production and oil services industries but not increased the average Joe’s propensity to consume the financial surplus in his or her pocket.

Is the solution to be found in economic or psychological analysis? Have Americans undergone some profound national personality change? Has that historic unquenchable confidence and optimism, which was linked to the great westwards expansion in the nineteenth century in search of low cost and abundant land and natural resources, now gone? Are Americans now less willing to take a chance in a land that was once able to bail out economic setbacks, through another move westward? Perhaps it is also due to the loss of individual enterprises like the vanished “mom and pop” stores to branches of large nationwide corporations. Or possibly, to a realisation that robots and artificial intelligence will mean fewer job opportunities in future? We know from surveys of public opinion that Americans are more pessimistic about the opportunities for their children and conscious of the drying up of traditional “trickle down” economics. I do not claim to know the answer to these questions, nor do I know if the questions are relevant to the analysis of why Americans do not seem to be spending in the way they used to.

Otherwise, it must be put down exclusively to the usual economic suspects. To the impact of those big, international “secular changes” on the US economy: historically high debt levels; over capacity on the supply side; the (sometimes) insidious changes brought by technology and the fact that Americans are on average considerably older than they were several decades ago.

Back in the United Kingdom there is similar evidence of such concerns amongst policy makers. Here too we were informed by the Governor of the Bank of England that the next move in interest rates would be up. But the engine of economic combustion appears to be faltering. Not only is it reported that the members of the Bank’s Monetary Policy Committee (MPC) have unanimously switched interest rates from drive gear to park; there is also new talk of providing responsive stimulus if economic conditions unexpectedly deteriorate. That is pretty much what the Governor of the Bank of England told the Treasury Select Committee. It is my impression that he was describing a knee-jerk reaction to any negative economic surprises on the downside. The mood is suddenly changed and some crystal-ball watchers (sorry, I should have said economic metric analysts) apparently now foresee no increase in bank rates for three or four years!

Meanwhile, thanks in part to the Brexit referendum and our nation’s trade deficit position, the pound/dollar exchange rate has moved significantly lower in favour of the dollar. Just when you think the message is clear, those mists come swirling in again with enveloped contradictions. Consumer confidence is still strong and whilst the pound fell the government was able to sell £2.7 billion of an inflation-linked 50 year gilt, at a reportedly near record high price on the back of demand 3.7 times greater than the supply.

Rather like that gilt auction, the economic situation poses more unanswered questions than answers. The macroeconomic radar now shows a likely bumpy ride and a fog of low (and possibly even lower) rates. As Mr Donald D. Trump says, “What the hell is going on?”