Debt explains Labour’s “odd habits of locomotion”

Note from Nick: By the end of this month a single announcement in Westminster could trigger a major panic. Why? Over at The Fleet Street Letter we believe this “shadow currency” will be the trigger. Make sure to get all the details here and learn how you can prepare while there’s still time.

In today’s issue:

• Labour is in an invisible debtor’s prison
• Politicians have woken up to the threat, but voters haven’t
• How do you get elected in an age of fiscal crisis?

Politicians have talked about debt and deficits for decades. But it was just a political hockey puck to pass around. A future problem that didn’t actually threaten anybody’s political career. Until Liz Truss proved otherwise.

These days, the prospect of an imminent debt crisis is doing bizarre things to our politicians. At first glance, their behaviour makes little sense. Until you discover they’re terrified of another “Liz Truss Moment”.

Here in the UK, Labour are behaving like the miserly Tories did during austerity. It’s not going well though. Bloomberg published an intriguing piece that pointed out higher taxes might not raise more revenue:

When Prime Minister Keir Starmer and Chancellor of the Exchequer Rachel Reeves plotted Labour’s path to power in the UK, they banked on eye-catching moves to hike taxes on private equity and ultra-rich “non-dom” residents to fund key spending plans. Now, those promises are meeting reality.

Reeves is reviewing how to implement both pledges because of internal Treasury analysis which says the moves could end up costing the exchequer money, rather than raising upwards of £5 billion ($6.6 billion) over the parliamentary term,

This probably applies to all manner of other taxes Labour might consider raising too. But it’s truly bizarre that Labour decided to hike taxes on the parts of the economy most likely to do a “John Galt”. Private schools are discretionary spending. Non-doms are… non-doms. And private equity is notoriously fleeting too.

On the spending side, things are just as odd. Labour are behaving like Scrooge from A Christmas Carol over home heating. It can only be explained by a panic about debt and deficits. They believe in their own fiscal black hole.

But it’s not just our politicians behaving strangely…

After decades of talking about deficits, the Republican Party have suddenly stopped mentioning them. And just when it finally mattered, too. But it’s Donald Trump who is openly being threatened with a Liz Truss Moment by members of US the civil service and media. This being the party that is more fiscally conservative…

The Democrats’ deficits have been frightening. And the US’ Social Security is set to go broke within a decade.

The German media is reporting that Germany’s nursing care insurance fund could be broke by February. This despite being funded by mandatory contributions from all workers in Germany…

In France, President Emmanuel Macron is urging all sorts of budgetary spending burst and cuts. The French don’t know whether he’s coming or going.

The International Monetary Fund is even warning Australia of its dangerous spending, despite the government running an impressive fiscal surplus…

It’s political confusion everywhere. Why? The long-term fiscal future is suddenly starting to matter here and now. In direct enough ways to change the behaviours of our politicians.

The trouble is, none of them know how to behave in the face of an overindebted government.

How do you get elected in an age of fiscal crisis?

In the past we’ve had debt-to-GDP ratios that make our current 100% look boring. But those occurred during periods of geopolitical chaos and demographic euphoria. It was only ever a matter of time before the country would recover. If only by growing the population to get debt back under control.

This time, however, demographics is the very cause of our problem. And even resolving geopolitical crises won’t solve that.

The problem will get worse over time, not better.

So, how does a politician trying to get elected deal with this?

Does it become something nobody talks about and tries to ignore for as long as possible?

That’s the Japanese method. But I suspect the place is quite unique at dealing with problems by not talking about them.

The current crop of American politicians are trying the same method of “deficits don’t matter”. Their ploy is based on America’s geopolitical prowess. Foreign nations can’t do away with the US dollar. They need it to conduct trade. And so they tend to own US government bonds as a reserve asset. But even that’s changing.

In the UK, our government is testing the waters for austerity via higher taxes. If Bloomberg is right, that won’t work. Taxes are already too high to raise more revenue. It’s spending that’ll have to go. But that has proven unpopular to say the least. The Conservatives are polling within a margin of error already – before the first budget.

This is immensely ironic. Having placed the Office for Budget Responsibility in charge of the country’s finances, Labour have discovered they are so far gone that only unpopular policies will get past the financial guardians.

But I don’t want you to focus on the UK. This is a global phenomenon. It seems to me that politicians are behaving in increasingly bizarre ways to deal with this new financial pressure on their ability to hand out taxpayer-funded goodies.

And just when they’re trying to save the planet from carbon dioxide too.

It reminds all me of a book I’m reading…

A prison with invisible walls

The Baroque Cycle is a series of novels about many of the themes we face today. Impressive given it’s about the turn of the 18th century.

It’s historical fiction – a mix of real history that fills in the blanks with swashbuckling tales. Some bits that sound too good to be true really did happen though. Including a well-disguised Isaac Newton trying to track down counterfeiters through some of the dodgier suburbs of London.

There’s a particular plot device that turns out to be rather important later in the final novel. I presume it’s true. It’s about the Fleet Prison’s rather unique rules and regulations.

Debtors who had been imprisoned there could purchase the right to move about the prison’s six acres freely:

This and other such securities, by very long-standing tradition, made it at least theoretically possible for those who’d been put in prison for debt—which meant most of the Fleet’s population—to move, and in some cases set up domiciles, outside of the Prison proper but within the rules, which was nearly indistinguishable from other seedy neighborhoods of London.

The only way you’d really know you were in a prison was that certain chaps had odd habits of locomotion—in the interior of the six acres they’d move about like anyone else, but as they approached the boundary streets they’d become tentative, as if they could sense an invisible barrier, and would sidle along cautiously, lest a misstep or traffic accident push them over the border and make them guilty of Escape.

Later in the book, if I recall correctly, a character gets caught out by unwittingly crossing one of those invisible lines that makes him guilty of escape.

But here’s the broader point. It all reminds me of our politicians today…

The strange locomotion of our government

Our politicians know they’re in debtor’s prison. Bill Bonner explains that in tomorrow’s edition of Fortune & Freedom.

And they also know that they can continue to operate normally, as long as their bonds are good.

The electorate, however, have not woken up to the immense threat of a fiscal crisis.

And so politicians’ “habits of locomotion” have become a little odd. They’re having to tiptoe around barriers that are invisible to most of the electorate. These walls are the limits to their borrowing capacity. The big fear is that they’ll end up like Liz Truss and Kwasi Kwarteng, who crossed the line without realising it.

What happens next? Find out here.

Until next time,

Nick Hubble
Editor, Fortune & Freedom