“The devaluation of the pound went off like a bomb that you can hear coming, but makes you jump just the same. The public is still rocking from the startling effects of the explosion, unsure as to whether things will be looking better or worse when, eventually, the smoke clears… Even those Britons who expected devaluation seem somewhat astonished by the briskness with which [the Chancellor] has bent the pound, not to mention its staggering new angle.” – A reaction to the 30% sterling devaluation of September 1949, cited in David Kynaston’s Austerity Britain: 1945-1951.
The 2010 election campaign is proving both vitally important yet deadly dull at the same time. The most popular comparison so far has been between 2010 and 1992 – when a tired and unpopular incumbent managed re-election despite the evidence of the opinion polls.
I prefer to make the comparison with Britain’s 1945 experience. Back then, a nation demoralised, exhausted and bankrupted by war looked forward with understandable apprehension. The future, we now know, held yet more rationing in store, along with exchange controls and a stunning currency devaluation. This time, we share the demoralisation, exhaustion, and national bankruptcy. Warfare has played only a small, if expensive, role; the really climactic – and life-threateningly costly – conflict has been in saving the banks from themselves. But we still look forward with reticence. Since none of our major political parties has been remotely honest about the scale of spending cuts to come (the Financial Times last week pointed to a £30bn hole in each party’s manifesto pledges), whoever is unfortunate enough to win on 6 May faces dealing with an angry mob almost immediately afterwards.
But exchange controls and currency devaluation? It’s possible. I cannot recall a time when the market outlook has been so polarised between such radically different, yet perfectly plausible, outcomes. On the one hand there is the deflationist argument. The UK government, of whichever stripe, cannot possibly withdraw its economic stimulus. Given the absence of bank-sector credit, the removal of government (i.e. taxpayer-funded) spending would cause a gravely weak economy to implode.
On the other hand are the inflationists. The money creation to date has been unprecedented. As a government that already faces an unparalleled peace-time debt burden seeks in desperation to monetise that debt, we risk not just a gilts crisis but a flight from sterling, too.
But the 1945 comparison only goes so far. What the future also held then was a vast expansion of the state’s infrastructure into the health and welfare of all its citizens – the birth of the National Health Service. Under Labour, the post-war government also began, albeit ponderously, to tackle a chronic housing deficit. This time round, whoever wins will have to start rolling back the overbearing apparatus of the state. We simply cannot afford Labour’s legacy, let alone the grandiose promises made by the competing parties today.
When you see a violent storm coming, it pays to get out of the way. There is an ominous sucking sound gathering strength. It is coming from Westminster, and it is after your money. Its appetite is unlikely to have been sated by the cursory sacrifices so far delivered up via some tweaks to the higher rate of income tax.
In a sense, the currency devaluation has already been done by stealth. But an outright Labour victory on 6 May could easily see a renewed sell-off in sterling, already the Western currency-world’s favourite whipping boy. Whether a hung parliament would necessarily be just as bad is unclear. It’s possible that a coalition government might find draconian spending cuts a little easier to pull off, on the basis that no one party would stand front and centre to take the blame. As the Tories are currently saying, “We are all in this together.”
But it makes no sense to hold UK government bonds as far as I can see. Quite simply, there are better returns out there in government bond-land, and with less risk when it comes to either currency.
And there are obvious go-to assets at a time of unique national discomfort. Gold caters to both currency risk and the declining credit quality associated with UK plc. For those who still like their money in paper form, there are harder alternatives: Singapore or Canadian dollars, perhaps, or Swiss francs. For the time being, at least, the foreign exchange market is open.
The contrarian trade, of course, would be to buy sterling – or UK government bonds for those who like their contrarianism of the full-fat variety. But that would tend to suggest that our fiscal problems can be resolved with care, application and discipline. I seriously doubt whether the political will exists to tackle the post-crisis malaise. What politicians cannot solve will ultimately be sorted out for them by the markets – the closest thing we now have to a real working democracy.
• Tim Price is director of investments at PFP Wealth Management. He also edits The Price Report investment newsletter.