We haven’t been this broke since…


The decade that would be remembered as the swinging 60s had begun to earn its namesake. ‘63 saw the release of The Beatles’ first album (Please, Please Me), The Rolling Stones’ first single (a cover of Chuck Berry’s Come On) and Johnny Cash’s Ring of Fire with June Carter…

The Cuban Missile Crisis the year before had marked a near-term peak in Cold War tensions between East and West. ‘63 saw the withdrawal of thousands of Soviet troops from Cuba, and the creation of the Moscow-Washington hotline (often depicted as the “red telephone”) to help defuse future nuclear showdowns.

But that didn’t tone down the intensity of the espionage. Of particular significance to us here at Southbank Investment Research, it was in ‘63 that Kim Philby – a former editor of The Fleet Street Letter no less – was outed as a Soviet spy and fled to the USSR, surfacing in Moscow later in the year.

‘63 goes down in history, however, as the year JFK was assassinated. Some folks on the fringe like to point out that the CIA’s Domestic Operations Division was set up nine months prior in February…

It was an explosive year by all counts.

We’re probably giving it a run for its money when it comes to major events here in 2020, but interestingly, one key similarity between now and then has emerged.

‘63 was the last year when the UK government debt pile was larger than our entire economy. Yep, UK government debt as a percentage of GDP just hit 100%, at a mere £2 trillion pounds.

Back in the 60s, much of that debt pile was a hangover from the Second World War. Today, it’s the decades of government borrowing now amplified by the WuFlu budget splurge that has blessed us with a debt burden that has such a nice round number and accompanying percentage.

And back in ‘63, the UK’s government’s debt levels were falling relative to the strength of our economy, not climbing as it is now. UK government debt-to-GDP was well over 200% in the late forties, and the 100% level hit in ‘63 was just another level that it passed as it kept getting lower. That didn’t mean the government was doing fine, of course. Harold Wilson devalued the pound four years later, famously trying to excuse the act by saying the pound in your pocket here at home wouldn’t be worth any less – only abroad.

But gross indebtedness creates similar constraints whatever the decade. Back in the 60s, this meant that the UK was very slow to modernise its infrastructure. We were still ferrying people around on steam trains in ‘63, and would continue to until ‘68 with the “dieselisation” initiative.

Today, massive indebtedness will make it harder for governments to keep making massive spending commitments, at a time when the political demand for them keeps getting louder. It’s at this juncture that central banks, like a joker card or blank Scrabble tile, comes in: printing money to finance the government either directly or as we’ve seen it employed so far, indirectly.

A blank Scrabble tile doesn’t add to your score, it only makes it easier to keep playing. Similarly, the assistance of a central bank financing the government doesn’t make the government any richer – it only helps the government “keep playing” (ie, stay in power) by stealing the purchasing power of those who have savings and spending it on whatever pet project they want to get elected.

Governments have been getting away with this in the developed world for some time now, but the process of wealth redistribution in this manner will only become more overt as the government keeps ramping up spending.

Emerging market economies, having been berated by economists for years for reverting to overt money printing, are pleased to find that they can in fact get away with it, provided they call it “quantitative easing”. From the Financial Times:

For the first time, roughly a dozen central banks in the developing world have taken a cue from peers in advanced economies and begun buying government bonds and other assets as part of their own versions of “quantitative easing”…

The broader use of QE-like policies by EM countries represents a stark divergence from previous crises. In the midst of the global financial crisis more than a decade ago, just two EM central banks carried out asset purchases: the Bank of Korea bought corporate bonds and commercial paper while the Bank of Israel snapped up government bonds.  

Both South Korea and Israel have restarted their bond buying in response to the global pandemic, but have since been joined by a host of other countries including Poland, Hungary, Malaysia, the Philippines and Indonesia. Turkey and South Africa are among the more risky countries that have also followed suit…

By the end of the 60s with the overt devaluation of the pound by Wilson, inflation began to ramp up significantly where it would continue throughout the 70s.

This was good for the government, as the inflation was burning away the government’s debt (though not quite so fast as the government was spending it). It was brutal for everybody else, as inflation destroyed savings and capital alike – only shrewd investors prospered from this radical change in the investing environment.

In this month’s issue of The Fleet Street Letter Monthly Alert, we’re examining the case for a return of high inflation, spurred on just like it was in the 60s by currency devaluation and government spending. While the devaluation this time around won’t be as overt as Wilson’s was (instead being fostered by the continuing financing of governments via their central banks), the danger for investors is the same.

But as we’ll be exploring in the issue, if “the great inflation” does indeed arrive, investors in Britain are uniquely advantaged to survive such a scenario over those in other countries. UK investors have a trick up their sleeve which they can use to protect their portfolio which investors in other countries (including the US) aren’t so lucky to have. But of course, to use it and protect themselves, they first need to know it’s there…

All the best,

Boaz Shoshan
Editor, Capital & Conflict

For charts and other financial/geopolitical content, follow me on Twitter: @FederalExcess.

Category: Market updates

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