HAMISH MCRAE: Watch out! Inflation could rise
In Britain we wait to see how badly we will be battered by Rachel Reeves in her Budget in ten days’ time. But governments in virtually all major economies are in the same situation: a struggle to cover daily expenses with tax revenues and the skyrocketing costs of financing the national debt.
This push was highlighted by the International Monetary Fund ahead of its annual meeting this week in Washington. It was noted that total public debt would surpass $100 trillion (£77 trillion) by the end of this year, reaching more than 100 percent of global output – or gross domestic product – by the end of this decade, perhaps much sooner.
Britain passed that specific milestone in August, with public debt at £2.7 trillion, up more than 4.3 percentage points from a year earlier.
The Office of Budget Responsibility expects that servicing those debts will cost £89 billion this financial year, or 7.3 percent of all government spending. We will face this because we have no choice. We have to borrow from the markets and at the moment that costs us more than 4 percent for ten-year money.
France and Italy are also raising taxes, although it is unclear whether French Prime Minister Michel Barnier will get his budget through. The challenge for everyone is to contain spending and get more money out of the tax system without hurting growth.
Under control?: We should be aware that inflation is likely to rise again
There is a clear danger of creating the wrong balance, as evidenced by the work of the Center for Economic and Business Research which highlights the opposite. But something has to be done.
However, there is one country that is not taking any action to reduce its national debt, and that is the most important of all: the US.
The debt burden is already higher than here – the Federal Reserve Bank of St. Louis estimates it at 120 percent of GDP – and is expected to rise even higher if the policies of both presidential candidates are implemented unchanged. For Donald Trump, lower taxes are the main driver, for Kamala Harris higher spending, but the result would be much the same.
The projections show a slightly higher budget deficit under Trump, but rising almost as quickly under Harris. So while the old adage is true – the president proposes, but Congress decides – there are every signs at this point that the US national debt will continue to rise.
That is, until something stops it. What could that be? That’s a tough one. Right now, the size and buoyancy of the US economy, plus the dollar’s safe-haven status, mean global investors are eager to continue funding the government. The dollar remains powerful – where else would you put your money? But there have been periods when investors have lost confidence in dollar assets.
The most dramatic episode occurred in 1980, when Federal Reserve Chairman Paul Volcker raised interest rates to 20 percent to suppress inflation and restore confidence in the currency.
America will not go bankrupt. It can print the money. But there are warning signs, including the record price of gold, that investors are nervous.
Global debt is an issue that people are concerned about, as evidenced by the IMF’s comments, but what will drive the change will be something that causes investors to lose confidence in sovereign debt.
We cannot know what will cause it – or when it will happen – but we do know that if something is unsustainable, it will not last.
So what does this mean for anyone trying to protect their savings? The overriding and disturbing conclusion is that we should be aware that inflation is likely to rise again. They can’t say it, but governments around the world favor it because it lowers the real value of the national debt and secretly increases the tax burden. We see the latter here because the tax brackets are frozen.
That involves buying real assets, especially real estate, and the shares of companies with pricing power – companies that produce goods and services that customers have to buy.
It means you shouldn’t keep cash in low-interest bank accounts. And it means that we should not hold government debt. Let someone else take the risk.
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