6 May 2020

Things are starting to get serious. The SAGE committee is vast and its remit is the virus and nothing but the virus. It has saved the NHS to the extent that the new Nightingale hospital near the O2 in London is shutting after four weeks. Job done except that most of the public is either scared out of its senses or, more worryingly, preferring a life of leisure on 80% wages.

The government is now directly supporting more than half the adult population. Normally I would say that a minority of taxpayers is bearing the burden of the rest but that is nowhere near the truth. Taxpayers are being furloughed too. The printers are rolling and the government is set to borrow from itself. The question is, how long will people be able to live on these new government tokens (once known as sterling currency)?


My son Leo has just written about the use of the first ancient coins. Greek traders who knew nothing of coinage were happy to use them, even though the gold/silver content was lower than natural bullion of the same weight. Leo was puzzled as to how items of lower intrinsic value continued to be accepted. My answer was that a coin’s real intrinsic value is the belief that if you accept it in return for a “real” good you will be able to pass it on to someone else in return for goods of the same value. But once that belief falters the coins will be swiftly debased.

The debasement of our currency will manifest itself as inflation. If you weren’t an adult by the 1980s you will not remember a time when people bought assets today for fear that they would cost more tomorrow. I knew a couple in about 1985 who agreed to buy a small house off the King’s Rd. It was suddenly withdrawn from the market and re-listed at a £50k premium. To their credit, I guess, they did not blink and paid up at once.

The US is issuing $3 trillion of debt this quarter. (That’s $9146 for every man, woman and child, or $11,363 for every adult). The US can get away with this because it is the currency of international trade and international loans. When e.g. Sri Lanka accepts a loan from China it owes China dollars because even China doesn’t want to be paid back in its own currency. People say that there is consequently a structural global shortage of dollars. Happy days for the US.

There is no global shortage of sterling. There is no safety net for the pound as it leaps from one branch of the magic money tree to another.


Many commentators point to a collapse in global demand, a continued collapse in global interest rates, the smashing of the oil price and they forecast deflation. Well, yes. But that would be deflation in goods priced in dollars. If you want to buy these goods using (an extreme example to make the point) the Argentinian peso you will see no deflation. Five years ago a peso was worth 11 US cents – today, 1.5 cents. In Argentina this is experienced as consumer price inflation of 40% (2020 estimate).

(At time of writing Argentina is reported to be considering its ninth sovereign debt default.)

The UK does not have to turn into Argentina for a devaluation in sterling to begin. Of course, currencies do not devalue in isolation – they fall against other more trusted currencies. I regard a devaluation against the US dollar as highly probable and against the euro as more likely than not. Germany’s constitutional court has just given a thumbs down to the ECB’s pan-euro area asset purchasing plan. As usual, Germany is keener on preserving the integrity of the euro than providing support to the ailing economies of the naughty nations like Greece and Italy. It may not be pretty to watch but it removes at least one option of euro currency debasement.


I think we are approaching the point at which each extra week of lockdown delivers a life-changing blow to the economy. Outlier commentators aside, I see very little sign that the government is treating this danger with the urgency it merits. This is matched by an alarming lack of concern among my fellow citizens. They have been told that only “key workers” are important and that we can jog along fine with everyone else sedentary at home.

Do people wonder at the full shelves in the supermarkets? We are virtuously queuing and social distancing and waiting our turn to buy ample quantities of fresh fruit and vegetables. Unless you are living on rhubarb and asparagus the chances are that this food is coming from Africa or Spain. Someone anonymous is working very hard at considerable inconvenience to themselves to enable you to hide in your house and go to the supermarket or order online once a week. This is what our government has encouraged you to do and you are only obeying orders. Wake up, people, the real world is going to catch up with you and bite you in the bottom real soon.


As an investor I can see which businesses are doing well – many technology companies, some pharma companies and a few supermarkets and delivery specialists. Construction is restarting slowly and infrastructure projects are one of the few areas where governments invest directly. That just leaves the remaining 80% of the economy.

What of the rest? Most intercontinental airlines are already bust and as usual national governments are bailing out their favourites, much to the fury of the more efficient short-haul specialists like Ryanair and Easyjet. Many airports are on the verge of ruin. Gatwick appears to have lost BA and Virgin in the last few days. I don’t know how robust regional airports are but I know that many airports are loaded with debt because lenders regarded air travel as so robust.

Many holiday companies are facing a liquidity crisis as they have to return deposits on holidays that were sold long ago and will not take place. People will be very eager to get away this summer if the destination countries will have them and if the carriers and the hotels have not gone under.

As for the rest of the leisure sector, bars and restaurants – I think the default outcome is that they will, well, default. Many of them make next to no profit at the best of times. In turn, their landlords will find themselves with empty properties and having to have their own conversation with their lenders.

And that leads effortlessly back to the banks. Provisions for bad debts are starting to rise but the survivors of 2009 could easily find themselves back to square one or even square zero. Imagine, just when you thought it couldn’t get worse, if the government has to rescue all the banks again.

Just over two weeks ago I wrote:

In my view the government would be well advised to talk up the restarting of the economy and attempt to grab some credit for it. You can be sure that it will get all the credit it deserves for the job losses, the falling incomes and the bankruptcies.

I fear that the time for grabbing credit has gone. Now things are really serious. This is an economic emergency. Now.

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