Country Risk part 2: The Bad Boys of Brexit, Government borrowing and MMT

Risk and The Bad Boys of Brexit

Molly Scott Cato, economics professor, coined the term ‘Bad Boys of Brexit’. Her website and full listing of ‘Bad Boys’ is recommended reading.

Among those discussed in this article, Jacob Rees-Mogg MP features on the list of ‘Bad Boys’; his background is in investment finance. MPs also under discussion are John Redwood whose background is in financial management, and Chancellor Rishi Sunak with a background in hedge fund management. 

Frances Coppola, a former finance journalist for Forbes, wrote interesting pieces on the double standards present in our own government regarding risk management. John Redwood advised people to avoid investing in Britain before the ‘credit crunch’ hit. A ‘credit crunch’ means banks would be less likely to lend to consumers and businesses.

His article pre-dates coronavirus and the Johnson regime. Why would a patriot advise investors to remove money from Britain? In his role in parliament Redwood is an advocate of hard Brexit (‘No Deal’) on World Trade Organisation (WTO) terms. His advice in the private sector is the opposite. Why?

Jacob Rees-Mogg owns the investment company Somerset Capital. Founded in 2007, it notoriously uses tax havens to minimise tax bills. Rees-Mogg moved part of his business to Dublin, to continue after Brexit when UK based finance firms lose the right to financial passporting which allows them to sell investment and insurance services in the EEA. Rees-Mogg is an advocate of hard Brexit in parliament. One rule for them, another for us.

Leading Brexiteers claim to have faith in No Deal for the UK in public, yet protect themselves against the damages it causes in private. Rees-Mogg is not alone in keeping his finger in the European pie; Nigel Farage obtained German passports for his children. 

Coppola explained that Rees-Mogg’s fund invests primarily in countries in emerging markets, which due to their nature would not fall into EU trade rules on ‘most favoured nations’ to encourage development. He stands to profit from our departure from the Single Market. The companies in which he has invested may access the UK market and increase profits.

Boris Johnson’s shady links to hedge funds

The billionaire hedge fund managers who paid for Johnson, Dominic Cummings and Michael Gove’s Vote Leave campaign are also intent on the UK crashing out of Europe because they have made very large ‘shorts’, or ‘bets’ against the UK economy worth hundreds of millions of pounds. Sir Paul Marshall is one such, but the most famous is Crispin Odey, former son-in-law of Rupert Murdoch, the newspaper baron. Odey is a major influence on Johnson.

Odey ‘shorted’ the pound on Referendum night in 2016 to make 220 million using leaked Vote Leave exit polls. Bloomberg famously reported on this, including photographic evidence of Farage cheering in front of the TV as markets revealed a tumbling pound.

Odey is a donor to Johnson’s election campaign. He commands Johnson on strategy. ‘Tories at War’ on Channel 4 (22 September 2019) depicted Odey on camera admitting that he advised Johnson to call an early election, get Labour to agree, and win a huge majority so he could do whatever he wished. 

Odey, who Rees-Mogg described as a ‘good friend’, not only funded Rees-Mogg’s 2015 election campaign but also helped him set up and run Somerset Capital.

• Country Risk: what this means for Britain, consumers and business
• Planting the seeds of revolt!
• Boris’s border breakout?
• The fallacy of the sovereignty argument
• Alternative ways to protest during ‘lockdown’

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Bankers and financiers have influence on policy-makers in parliament. In the current climate, these are policy-makers who have the power to govern by decree without parliamentary scrutiny. This is a dangerous move not only for our democracy, but also for economic stability. It also smacks of insider-trading which is illegal. Under normal circumstances, at least in Europe, those working in banking and finance are required to swear under oath that they will keep to the law and not engage in insider-trading and market manipulation. The Dutch bankers’ oath prohibits involvement in any investment ventures which would fall under insider-trading. Britain seems to be deviating from these standards, and this requires urgent action by both the Opposition in parliament and legal brains.

Hedge fund managers disliked the EU Anti-Tax Avoidance Package which would curb profits and any tax avoidance via tax havens. This is well documented. During the coronavirus pandemic Britain has missed out on millions in tax revenues which we badly need. There is another reason they disliked the EU controls: EU Financial Regulations enacted in 2013 oblige hedge funds to take care with investors’ money and advise on safe practices to ensure they cannot gamble with their customers’ money unnecessarily.

Our own Financial Services Compensation Scheme (FSCS) guarantee of £85,000 investment per institution stems from such EU legislation (the EU protects €100,000 per institution).

Cummings is an attractive figure to these bankers and financiers as he promotes the end of: the NHS, workers’ rights (the Minimum Wage), and financial controls on bankers. Cummings must stay in Westminster to deliver their No Deal Brexit. They in turn support his technical dreams, in which he takes back control of our data for use in business ventures.

Government borrowing

One of the most salient bets Odey has made is against government debt[KS1] . Brexit and the coronavirus pandemic provide opportunities for him to win his bet at our expense.

Even pre-coronavirus, rating agency Moody’s had gross misgivings about UK debt. Before the December 2019 general election, the background of Brexit and No Deal in particular, gave Moody’s reason for pessimism. They cited the UK’s £1.8 trillion of public debt – more than 80% of annual economic output – risked rising again and the economy could be “more susceptible to shocks than previously assumed.” Boris Johnson’s victory and the great coronavirus bug put us in a worse position.

As Chancellor of the Exchequer, Rishi Sunak’s background in finance merits further mention. Sunak’s wife is Akshata Murthy, daughter of NR Narayana Murthy the billionaire founder of global IT firm Infosys. Prior to becoming MP, Sunak founded an investment company with her, Catamaran Ventures. It holds stakes in Acamar Films which makes the children’s TV programme ‘Bing’ for the BBC. A No Deal-engendered fall in the pound will have little impact on his lifestyle.

In 2007 Sunak was a partner at aggressive hedge fund TCI which, like many hedge funds, stashes its money in tax havens. It held as its ‘trademark’ mode of operation the use of financial power to force companies to change their management strategy. TCI became infamous in 2007 for its campaign against Dutch bank ABN Amro, which resulted in the latter’s sale to Royal Bank of Scotland (RBS). The deal gave RBS massive debt, which led to a government bail-out of £45.5 billion . UK Treasury sources say Sunak had no role in the deal. As Chancellor, Sunak is responsible for managing the taxpayers’ holdings, but his actions are also key to the future of our currency. This is worrying.

Current UK public debt is massive, at levels not seen since World War II. Debt has exceeded £2 trillion for the first time; at the end of July 2020 it was £2,004.0 billion, £227.6 billion more than July 2019. This will only carry over to future generations. Deutsche Bank noted a 2070 government debt/GDP ratio of 418%. During the austerity drive just five years ago, that same 2070 forecast was just 87%.

MMT – Modern Monetary Theory/Magic Money Tree (Printing Money) alias Quantitative Easing Programmes

The coronavirus pandemic has seen moves towards Modern Monetary Theory (MMT) to deal with soaring public debt. The financial term is also known as quantitative easing (QE) or asset purchase. Brexit and our government by a reckless regime put the UK in a highly precarious position; MMT is not just about money, it is about power.

The UK is engaged in quantitative easing and this trend is set to increase over the next year to £1 trillion, a topic on which even the Daily Mail is writing. The Treasury issued £45bn of Government bonds – or gilts – to raise money to get Britain through the crisis when the stock market crashed in mid-March 2020. The Debt Management Office, which organises the sale of gilts for the Treasury, was on the brink of failing to complete a bond auction for the lockdown rescue package. The Bank of England then agreed to buy £200bn of gilts in May 2020 via its Quantitative Easing programme – a process that amounts to printing more money as it purchases government bonds. 

The Bank of England believes the UK could face its worst recession in 300 years. Governor Andrew Bailey unleashed another round of Quantitative Easing in June 2020. This takes the total amount of QE since the last financial crisis to almost £1 trillion.

The Bank of England writes about its approach to using digital money, but Rabobank advisors would warn them off this course of action, as would British economists.

Sunak’s borrowing causes effective printing of money by the Bank of England, and reports about it were flashed briefly on BBC news. If the pound is trashed, it means the value of our pensions, our savings, our purchasing power as private individuals, our businesses or our public sector organisations is weakened. Tesco and the NHS rely on the Pound to purchase supplies abroad; we are not a self-sufficient island. Price increases will be passed on to the consumer.

Ironically, the UK government put reserves in euros even before Johnson came to power. Britain now holds more euros than dollars in its reserves, reversing the position of June 2016. Labour cited this as evidence that the government was betting on the stability of the euro even as ministers prepared to rip us out of the EU.

Rabobank Research explains that in the EU countries are signed up to the Central Bank and are not allowed to print money unilaterally because of the risk it poses to the currency. Rabobank is a triple-A rated financial institution with vast experience, so their warnings are serious.

The Rabobank researchers established a set of MMT criteria in which they consider only seven countries worldwide to have a strong enough position to be able to print money without doing serious damage to their currency. Britain is not one of them. In fact, we are on a ‘do not even try it’ list marked in red. For safe MMT, countries need:

“[…] the rare combination of sovereign currency, simultaneous fiscal deficit and current account surplus, plus good governance”.

Clearly not us under Johnson. A major MMT fiscal package, such as Sunak has done for us, could push inflation up to 12% and a currency down by 25%. The effect of coronavirus has caused a drop in gross domestic products, and already led to staggering heights of public debt.

In Britain my point is Brexit makes this worse.

The Rabobank authors warn us:

“[MMT] could be the only course of medicine available to economies badly weakened by the impacts of the coronavirus. […] MMT is a medicine that will likely hurt more patients than it cures. Very few economies can hope to take it on a sustainable basis.”

Sovereign currency-issuing governments are financially unconstrained. Some governments may see money printing as a plus in that taxes are not needed to finance government spending. (Members of the electorate may see that as an advantage and this could increase their esteem for the irresponsible leaders). A government can finance any budget shortcoming by monetisation (printing money) and thus have no monetary limits. When a genuine national emergency arises, the government spends first, the central bank helps, and questions are asked later. Now remember, our parliament is already constrained by having a ‘government by decree’ or ‘parliament by decree’. With the massive Johnson majority we are truly in dangerous waters.

The government of a country can always spend a vast amount of printed money and it can create huge inflation as a result. This is also dangerous on the international scale, as Rabobank argues. A government may be in control of printing money, but it cannot force other countries to accept its printed money as a valuable currency! That currency is used to buy products, services and brain power. The consequences are usually inflation and huge economic problems, not solutions. The solution causes more problems than the cause, be that a pandemic or other political mess (eg a No Deal Brexit).

There are notable examples where MMT was attempted by governments to solve problems: attempts which subsequently failed. The devalued peso in Argentina, and hyper-inflation in Weimar Germany where a barrow of money was required to purchase a load of bread (this pre-dated the rise of Hitler).

Deficit spending past a certain level is prohibited in certain countries no matter how it is financed: where a government voluntarily accepts limits on its power, or other pressures force it to accept limits. The Eurozone is a key example of self-imposed fiscal limitation. The Eurozone is not allowed to print money. The European Central Bank disallows this as part of the policy to protect the currency. This point is not necessarily meant to advocate membership of the euro, it is about reasonable control being placed on a government. Ours seems to have none.

Printing money when the economy is not able to pull itself back up is the most dangerous strategy; coronavirus was bad, Brexit makes this worse for the UK. We do not have a current account surplus.

While the US dollar suffers ups and downs, it fares better under this scenario, simply because the dollar is used as a worldwide currency by many. Little English Pounds are not in that league. The pound has been dropped as a reserve currency, as reported by Bloomberg, and we are still inside the Brexit transition period.