Alarm bells are distress signals. As this election campaign reaches its climax the Financial Times registers high levels of investor distress as its wealthy readers panic over the possibility that real change is coming. The change they fear is not automation and AI. No, it’s the possibility that “If Labour come to power on this agenda the UK investment landscape will be time-warped back to the dark days of the 1970s.”
What this distress reveals is the ignorance of the fellow quoted above – the highly-paid asset manager Nick Burchett of Cavendish Asset Management. This should be a matter of concern to his clients. Should capitalists trust their money to a manager who dismisses financial deregulation, the rise of supply-side economics and the liberalization of capital movements as “the dark days of the 1970s”?
For that is indeed what characterized the 1970s – an era in which Keynes’s theories were heavily defeated, and replaced with Friedmanite and Hayekian markets, based on financial deregulation. Where Keynes was about demand and restraint, the 1970s was about supply and reckless expansion, as the macroeconomist, Geoff Tily argues here. Central to the inflation of the 1970s was a commitment to endless ‘growth’ and to the deregulation of credit creation. In nature growth begins with birth, moves to maturity and ends in death. In economics ‘growth’ is expected to expand continuously, and to be boundless.
The setting of ridiculously high, unsustainable growth targets for the British economy by the OECD in the 1960s naturally led to the expansion of economic activity, beyond the capacity of the economy. This in turn led to inflation – which was promptly blamed on the trades unions.
The key advocate for the concept of ‘growth’ was – wait for it – Samuel Brittan of the Financial Times. He proudly identified himself as a ‘growthman’. At a time of full employment, he and other economists raised the bar of economic expectations. Full employment was not a sufficient goal. It was to be abandoned. Instead the concept of growth was adopted as the goal of all economy policy by the newly-founded OECD in 1961. An extraordinary fifty per cent growth target was set for Britain for the whole of the 1960s:
These policies led to a series of credit booms – regarded as ‘infinite booms’ by for example, traders in sub-prime mortgages and collateralized debt obligations (CDOs) on Wall St. and in the City of London.
But there are limits to credit booms too. Indeed credit booms are the best predictors of financial crises.
So as sure as night follows day, the liberalization of finance was followed by a series of banking crises. These erupted in ‘the dark days of the 1970s’ in both advanced and emerging countries. The Latin American debt crisis launched another series of sovereign debt crises in 1982. Thanks to financial de-regulation of the American ‘thrift’ industry, the Savings and Loans crisis of the 1980s was followed by the 1987 stock market crash; the 1989 Junk Bond crash; the Tequila crisis of 1994; the Asia crisis of 1997-8; the Dotcom bubble of 1999-2000 and then the global financial crisis of 2007-9.
But while markets, banks, firms and millions of individuals “crashed and burned” the supply-side economic theory and policies of financial deregulation and capital mobility that underpinned the concept of ‘limitless growth’ were untouched. They remain intact to this day
Not only that. The latest credit boom has expanded massively and is bigger even than that which preceded the 2007-9 crisis. The pace of China’s credit expansion worries central bankers because it poses new risks to global financial stability. For while China has enormous capacity and potential, it too faces limits. The question for Nick Burchett’s wealthy clients should be this: when will the system once again hit the buffers of those limits?
Once upon a time that was the $64 question. Then it became the $64 million question. Now it is the $64 trillion question.
And it is that $64 trillion question that should be worrying Cavendish Asset Management and its ideological fund managers. Not the possibility that a Labour government will bring real change. Real change that might finally stabilize the British economy, and bring an end to the relentless cycle of credit inflation and then catastrophic debt deflation.
PS This appeared as a blog on the CLASS website on 6 December, 2019