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Osborne is fiddling like Gordon Brown. Here’s what to do – MoneyWeek

That’saroughsummaryofthefirsttenminutesofGeorgeOsborne’sAutumnStatementyesterday。

Therestofthestatementwaslargelycomposedoflittlegimmicksdesignedtodistractusallfromthesheermiseryofthebiggerpicture。

Iftoday’spapersareanythingtogoby,thatparticularploydidn’twork。

Andthebadnewsis,he’sprobablybeingtoooptimistic。

BlametheBankofEnglandforweakUKgrowth

TheAutumnStatementwasdepressing。

Oneofthemostdepressingthingsaboutitwasthat,evenalthoughitwasgloomy,itprobablywasn’tgloomyenough。

Andthat’ssayingsomething。

InMarchthisyear,OsbornewasconvincedthatBritainwouldbewellonthewaytostartingtocutthenationaldebtbytheendofthisparliament。

Butnowitturnsoutthatwe’llstillbespendingmorethanwemakeintaxrevenueuntilwellafterthenextelection。

AsChrisGilespointsoutintheFinancialTimes,theChancellor’stargetshaveslippedbythreeyearsinthespaceofjusteightmonths。

Sowhyhavethingsdeterioratedsobadly?

Assumingyoubelieveourshinynewbudgetwatchdog–theOfficeforBudgetResponsibility(OBR)–it’snothingtodowith‘thecuts’,whateverEdBallswouldliketopretend。

Indeed,ifyouwanttoblamesomeone,blametheBankofEngland。

TheBank’spolicyoftrashingthepoundviaquantitativeeasing(QE)isthemainreasonwhygrowthhasfallensofarbehindforecasts。

RobertChote,chairmanoftheOBR,notedinhisreport:“Mostoftheweaknesscanbeexplainedbyanexternalinflationshockconstrainingrealhouseholdconsumption”。

HouseholdsspentroughlyasmuchastheOBRhadexpected。

Butbecauseinflationwashigher,thatspendingboughtless。

TheotherreasonthatgrowthissoweakisbecauseBritainhasbeenpermanentlydamagedbythefinancialcrisis。

Intechnicalterms,our‘outputgap’issmallerthantheOBRhadthought。

Theeasiestwaytovisualisethis‘outputgap’istoimagineyouownalotofcarmanufacturingplants。

Whentheeconomyisrunningoutofpuff,youmothballsomeoftheplants。

Whenthingspickup,youbringthembackintoproduction。

Thenumberofplantssittinginmothballsisyour‘outputgap’–thedifferencebetweencurrentandpotentialproduction。

Butthensomeonecomesalongandinventsacarthatrunsonwater。

Demandforyourcarsispermanentlydamaged。

Halfofyourfactoriesneedtobedemolished。

Soregardlessofwhatstageofthecyclewe’reat,yourpeakcapacityisalwaysgoingtobesmaller。

Thisisanincrediblysubjectivemeasure。

Butyoudon’tneedtobeatopstatisticiantorealisethatthe2008crisishasrenderedsomepartsofthefinancialandpropertyindustriescompletelyredundant。

Inshort,thisallmeansthatBritaincanexpectlowergrowthinthefuture。

Lowergrowthmeanslowertaxes。

Andifyoustretchthatoutoverafewyears,itmeansthegapbetweenyourincomeandyourspendingcanendupbeingalotlargerthanyouhadhoped。

Whygiltyieldshavestayedsolow

Withamiserableoutlooklikethat,thechancellorwaskeentoaccentuatethepositives。

HehighlightedhowBritain’sborrowingcosts–asmeasuredbytheyieldongovernmentdebt(gilts)–haveremainedspectacularlylow。

He’sright。

Andtobefairtohim,it’satleastpartlybecausethegovernmenthastalkedagoodgame。

It’seasytoforgetnow,butatthelastelectionthebigfearwasagiltstrikeandarunonthepound。

There’snoquestionthatthegovernment’stoughtalkinghashelped–thecreditratingsagenciescertainlystressthatthegovernment’scommitmenttocuttingborrowingisakeyreasonthatBritainhasmaintaineditsAAArating。

However,muchasOsborneandDavidCameronwouldliketopretendit’salldowntothem,it’snot。

ThesecondreasonisthattheBankofEnglandisbuyinggilts。

Itmakesitmuchlessriskytoenteramarketifyouknowthatyouhaveaguaranteed,relativelyprice-insensitivebuyertoselltoatalaterdate。

Thethirdreasonofcourse,isEurope。

HereinBritain,thingslookugly,butbycomparisontoEurope,we’reasafeharbour。

Overseasbuyers–theJapaneseinparticularitseems–havebeenfleeingEuropewholesale。

Theydon’tjustwanttoavoidinsolventstates。

Theywantoutoftheeuroasawhole。

Thatmoneyhastogosomewhere–soBritainisseeingpartofthat。

Troubleis,Britainissoheavilyindebtedthatanybigshockcouldknockusrightoffcourse。

AsratingagencyFitchputit:“ThecapacityofUKpublicfinancestoabsorbadverseeconomicandfinancialshocksthatwouldresultinyethigherpublicdebtwhileretainingits‘AAA’statushaslargelybeenexhausted。



Staydefensiveandavoidgilts

Sowhatdoesallthismeanforyou?

Firstly,itmeansyoushouldstaydefensive。

QEmightbehurtingtheUK’sgrowth,buttheBankisalsoconvincedthatit’snecessarytokeepthefinancialsystemalive。

Sowecanprobablyexpectmoreofit。

Thatwillmeanmorepressureonconsumers,andmorereasontostickwithcompaniesthatcanwithstandrecession。

OurroundtableexpertspickoutafewgoodoptionsinthenextissueofMoneyWeekmagazine,outonFriday(ifyouwouldliketobecomeasubscriber,youcanclaimyourfirstthreeissuesfreehere)。

Also,we’davoidgilts。

Theyhavebeensolidperformersthisyear。

Andit’shardtoknowwhenthisparticular‘bubble’willpop。

Butthefactis,theUKlooksvulnerable。

IfattentionturnsfromEuropeforanylengthoftime,investorsmightberemindedthatourfinancesareinanatrociousstateaswell。

Andlastly,don’texpectthegovernmenttodoanythingsensibleaboutthis。

Osborne’srag-bagofideaswasjusttinkeringaroundtheedges。

We’vealreadycriticisedthefirst-timebuyersubsidy:DavidCameronismadtospend£400monthehousingmarket。

Launchingothergimmicksjustconfusesthingsevenmore。

Whatwereallyneedissimplification,andaflatteningofthetaxsystem。

Allwe’regettingismoreGordon-Brown-stylefiddling。

Thatwasprobablythemostdepressingaspectofthewholestatement。

Ourrecommendedarticlefortoday

HowSwedendodgedabullet–andBritaincouldtoo

LikeBritain,Swedenoncehadabloatedpublicsectorthatitcouldntaffordandstuntedeconomicgrowth。

Butnomore,saysBengtSaelensminde。

So,whatlessoncanwelearnfromtheSwedes?

HowSwedendodgedabullet–andBritaincouldtoo。



ThisarticleistakenfromthefreeinvestmentemailMoneyMorning。

SignuptoMoneyMorninghere。

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