America’s growth might not be all it appears

On Friday I had a long talk with my friend and star of the Inside Baseball with Old Chestnut podcast, Morris Sachs. Like myself, Morris is an old bond dog with whom I can talk about the darker, less well-lit and less frequently visited corners of the fixed-income markets and monetary policy. We often bemoan how such a complex part of the financial markets is discussed and apparently authoritatively by those with worryingly shallow knowledge. But of that more in the coming weeks. Morris’s co-star is one Liam Allen. Liam is not of a markets background, is not and never has been a banker or even worked in finance. They met cycling. Liam knew that “Old Chestnut” had by reputation made a stack of cash on Wall Street and began to ask questions. So it was that Liam became the Boswell to Morris’s Dr Johnson, the Engels to Morris’s Marx or the humble customs officer to Morris’s Laozi. But after 150 podcasts Liam has learnt a lot and it was on Friday’s call that Morris lauded Liam for having proposed that US interest rates might rise before they fall. This was before that idea had swept the Street during the course of the past week.

Although all the talk is about inflation, both in the US as in other developed economies, that is just one element of the central banks’ remit. The others are full employment and sustainable economic growth, the latter of which circumscribes avoiding booms and busts. Full employment also does not mean 100 per cent employment. Participation rate aside, the jobs market needs a pool of unemployed, a reserve that can be drawn upon when demand for labour picks up but which at the same time prevents rampant and therefore inflationary wage pressures. Somewhere between boom and bust lies what is known as trend growth. Trend growth is again a level of sustainable growth that does not fuel inflation by way of a shortage of supply relative to demand while at the same time not sucking dry the supply of labour with the aforementioned inflationary impact. In seaman’s vocabulary, the central banks are ideally looking for “steady as she goes”.   

Liam had quite rightly pointed towards the ongoing disruptions in merchant shipping while at the same time looking towards the US growth trajectory. This week we are to be treated to a further reading, the first big revision of Q4/2023 GDP.  In January we were given the initial estimate at 3.3 per cent but there is a prevailing sense that the economy might prove to have been stronger than that. But even 3.3 per cent is strong growth and as we know from the Chinese example, cutting rates is primarily stimulative. Does the US economy at that growth rate need stimulating? Or should the Fed not be keeping its foot off the gas and, should growth be higher than 3.3 per cent even considering gently depressing the brake pedal?

Monetary policy is not a precise science, that much is for sure. On 17 March 2022, the Fed began the current tightening cycle. And just to put those idiots who keep banging on about how many cuts they expect this year in their place, the tightening moves were four of 75 basis points (BPS), two of 50 BPS and five of 25 BPS apiece. Who gives a fig about how often they are to ease; we need to know by how much. That is why I need someone of Morris’s experience with whom to talk through my opinions and not the kind of spotty-nosed geeks who were leaping around no more than six weeks ago confidently predicting “six rate cuts” beginning in March. Just to belabour the point, and if only out of spite, were the Fed to have cut half a dozen times this year and were it to have done so by reversing in order its tightening moves of 2002, it would have had to cut by an aggregate of 375 BPS. Rant over.

I hear much about the way in which the US economy is outperforming those of the EU and the UK. As my former South African colleague would have put it: “Ees thet e fect?” Were the epic amounts of fiscal stimulus – call it excess deficit spending if you wish – offered up by President Joe Biden under the mantle of decarbonisation not to have driven growth, there would have been a real problem. During the course of his administration, the national debt will have increased from US$ 28 trillion to US$ 35 trillion. Call that an increase US$ 7 trillion. Divide that by four years and you get US$ 1.75 trillion per year. Annual US GDP is around US$ 28 trillion. Of every US$ 100 produced by the US economy US$ 6.25 is paid for out of the government deficit. And according to the Congressional Budget Office, there is no sign within the foreseeable future of that figure going any lower. Are we surprised that the US is outgrowing the rest of us, and should we really be that envious?

There is little doubt that the GFC was precipitated by too much cheap money having been sloshing around in the system when the economy was on fire. The obsessive focus had been on the low level of inflation. I am reminded of Bank of England Governor Mervyn King’s asinine NICE – non-inflationary constant expansion – economy which critically misread the big picture and the effects of imported disinflation. If our central bankers get too hung up on headline inflation and forget to take account of the other two big elements of their remit, then we are straight back on the road to perdition. Why are equity markets all crying out for the Fed to bring the punchbowl back into the room while they’re still drunk? Probably, from my perspective at least, it is because they are still drunk.

While on the subject of economic growth, I was struck by a story in the FT which recounts how Jim Ratcliffe, billionaire founder and chairman of INEOS and now also minority shareholder in Manchester United, has taken a swipe at the virtue signallers in Brussels. Ratcliffe is a native of my hometown of Oldham, officially the most deprived town in Britain, and, having grown up in social housing, is a truly self-made man. With that in mind, I will even forgive him for supporting Manchester United. Alas, Ratcliffe has told Brussels that had he known how impossible they have made manufacturing within the Union, he would have had to reconsider the €4 billion he is investing in building a new manufacturing plant in Belgium.  

I cannot remember how many years or even decades ago it is that I first pointed out that the European parliament appeared to be incapable of noticing that there is more to the world than the single market area and that economic and industrial policies must take account not only of intra-EU competition but include what is going on in the Americas, in Africa, but above all in China and Southeast Asia. But no, they behaved as though they were the measure of all things and that the rest of the world would naturally adopt all the EU’s uber-virtuous standards. Piffle! They have set up the EU economy right in the middle of the shooting gallery for everyone to see its weak points and inviting them to exploit them.

Ratcliffe did not mince his words when he said: “You’re going to go to America or China or the Middle East to build capacity if it’s this difficult in Europe”. It is of course true that if urban speed limits are set at 20 miles per hour rather than at 30 miles per hour, there will be less traffic accidents. If they are set at 10 miles per hour there will be even less and, behold, if the limit is set to zero, there will be none at all. Eureka! Londoners are all well aware that Mayor Sadiq Khan’s virtuous traffic calming is gradually strangling to death the centre of that wonderful city and plunging a stake through its beating heart. In its rush to be the leading light in decarbonised industry, the powers that be in Brussels are closing the door to investment with only scant regard for the social rather than environmental consequences. As in the traffic analogy, if there is no industry left in the EU it will easily be the first to net zero. As Radcliffe expressed it: “The manufacturing industry in Europe has been in decline for the last ten years relative to its primary competitors, which are America and China. We’ve been losing ground against these two. And that’s not the way to decarbonise”.

If you’re sitting in the European parliament in Brussels on around €160,000 a year – salary plus fixed expenses – and with the concomitant pension rights, it’s easy to feel morally superior. I for many years very happily but not very lucratively worked for BNP, the French bank. The bank had its “secrétaire general”, a sort of COO but one with added powers. He was very important in the hierarchy and a bit like the Prefect in French regional public administration. Anyhow, we also had a particularly opinionated Irish head of derivatives trading who, when the S.G. came to question what he was up to would simply reply “…and how much money did you make for the bank today?” He had a few other one-liners which I can’t repeat in polite company. Radcliffe might feel tempted to go to Brussels to equally ask “…and how many jobs did you create today?” Being a proper Oldham lad, I’m sure that he too has a few more direct phrases up his sleeve.

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