Political Implications

Submitted by Paul Warner on Thu, 31 Aug 2017 - 18:07

Too much time has elapsed since I last wrote down my thoughts and much has occurred in the interim. Interestingly a lot of what has happened bears the hallmarks of Populism, which we discussed last time. From a UK’s point of view, Theresa May decided that the only way to get her equivalent to the US’s ‘Freedom Caucus’ or John Major’s ‘bastards’ was to call a general election. At the time of the announcement she had a 17 point lead in the polls. As Harold Wilson once said “a week’s a long time in politics”. Four weeks must have seemed like an eternity.

With her advisers, Theresa May tried to run a presidential campaign with the slogan “strong and stable”. Since the campaign focussed solely on her, it meant that the opposition only had to put one person up against her. Labour’s Jeremy Corbyn ran a good campaign. The Labour machinery learnt from Trump’s victory. They mobilised social media. The young had Jeremy down as the new Obe Wan Kenobi, famed Jedi knight from Star Wars, whereas Theresa May was the wicked witch of the West. Jeremy saw the plight of the young and promised them anything that he thought would buy votes with the tax payers’ money. Theresa May’s ‘strong and stable’ campaign fell apart when she did a U-turn on what became known as Dementia Tax. Her awkward grimace when questioned about this change in policy, so soon after it was announced, did little to enhance her ‘presidential’ credentials. In the event the people reduced her majority. They did not want to give her the mandate to do whatever she wanted over Brexit.

Probably the most worrying thing about the election is the strength it has given to the far left in the Labour party. The centre left in the UK are following the same pattern as the Republicans in the US. They are basking in their leaders’ glory despite disagreeing with their politics. The economic policies of the Labour leader and his cohorts are very worrying for people in the UK when they represent the policies of the only viable opposition. This is best demonstrated by Jeremy’s glorification of the Hugo Chavez Bolivarian revolution. In a blog, which strangely disappeared from Jeremy’s website when the election campaign started, he stated how the radical policies in Venezuela had been so successful, providing for the poorest and liberating resources. We can all see what has happened over there. Despite the huge oil wealth, the country went from a budget surplus in 1999, to a deficit of over 14% of GDP when Chavez left office.

 So if the centre left allow the Corbynistas to control their party and the Conservative party lose their perceived economic competency, or decide to fall apart over Brexit, there is a very real chance that the UK could enter a period of very real economic uncertainty after the next election. (It is possible, if the Tories go for civil war, that election could be sooner than we think.) Unless of course leopards really can change their spots, how long will it be before we have a Labour UK Chancellor following Dennis Healy’s path and knocking on the door of the IMF? Even if Labour doesn’t get back into power, their ‘popular’ policies are having a dragging effect on those of the government. The desire to interfere with market efficiency is rising.

Ironically on the other side of the channel, we have Emmanuel Macron who swept to power with a brand new political party. After the Dutch rejected populism, this turned on its head the perception that the UK was the stable political entity in contrast with Europe. If Macron really does manage to change France’s economic policies by reducing the size of the state and changing employment laws to reduce unemployment, France could become the economists’ new golden boy. Whereas it would be good for the Franco-German axis, it is unlikely that it will help the inherent frictions caused between the North and South economies held within the single currency.

In the US we have seen Donald Trump move from one crisis to the next. Now he is nose to nose with Kim Jong-un about the North Koreans producing nuclear missiles, which could potentially reach the East coast of the US. At least in this spat, thanks to Kim Jong-un’s belligerence, Trump seems to have the backing of most of the UN. From an internal perspective Trump has failed to get any of his signature policies through. Theoretically, he ought to get some form of Tax reform agreed with the Republican Party. If he fails to achieve even that he will become a lame duck president and markets will lose any hope of a stimulus from his presidency.

The problem markets will have going forward, is that the world’s central banks will have to rein back on their printing and spending money, not least because in some areas they will run out of assets to buy. That means that we need politicians who are capable of stepping into the void that this will leave. At a recent investment meeting we concluded that the global economy will require some form of FDR moment (Franklin D Roosevelt). Some ‘New Deal’ in order to maintain any reasonable economic growth. That will require cancelling debt and investing in infrastructure. It wouldn’t be that hard to achieve this when such a large amount of debt is now held by central banks, which they have bought with printed money. Alas, the possibility of our politicians collectively working out the solution to the problems will require some form of crisis in order to get them to work together.