Chart of the day
This is the 30-year Breakeven Inflation Rate: i.e. the average CPI rate which would make an investor indifferent between holding 30 year nominal gilts and 30 year TIPS. The rate is still below the target rate of 2%, but it’s approaching it at a very rapid rate, having recovered from a dive to 1.3 in March. Obviously, in the past, the Fed has tightened too soon, but I don’t think Powell will risk a Taper Tantrum or Repo Madness this time, and his Average Inflation Targetting will give him cover for the rate to drift well above the target rate.
I think the Fed mainly looks at the 5-year 5-year equivalent of this, which is much more noisy, but not inconsistent. There is a recent dip, presumably the second wave, but my guess is that this won’t have the same impact on inflation expectations as the first, because the market will expect the bazooka again.
More or less a risk neutral day. Biden still hasn’t won, and neither has Trump. Non-farm payrolls beat consensus, at 638,000, but the unemployment rate is now 6.9%. This is grisly by any normal measure.
- Crude was down,
- Govt. bond yields were up, but show no clear trend,
- Energy was hammered, as you’d expect,
- gold was up, a tiny bit,
Steering the Economy
I’m reading a book of this title by Samuel Brittan. He looks at the Treasury in the UK from the time of the 1951 election to some time in the 70’s, including the Heath administration. Although I was alive for some of this time, I didn’t really take much interest in what the Treasury was doing. Reading the book seems like reading about another country. The Treasury was constantly trying to slow down demand growth so that we didn’t get a balance of payments crisis and a run on the pound. We seemed always to be borrowing from the IMF to pay for imports. The unemployment rate hovered around 1.1%: a number that is inconceivable today. Labour was regarded quite favourably by business, because they took the needs of industry and the goal of improving productivity much more seriously than the Tories. They also had some first class economic brains in the cabinet and shadow cabinet: people like Hugh Gaitskill and Harold Wilson.
Now nobody every talks about the level of the pound, but the 1967 devaluation, although not the first in the period, was a deeply traumatic event. I suppose that with all governments today furiously debasing their currencies, we’ve arrived, by accident, at a regime of relatively stable relative rates. The only evidence that the currencies are being debased is their performance against a reference material such as oil or gold (or a suitable basket of commodities although that tends always to be dominated by the price of oil).
Everyone seems to have lost interest in this. I am sure that it’s a good thing. The twenty-fifth most common cause of death in the UK should not be a subject that dominates our waking hours. The bill for the economic damage caused by this pandemic is surely going to come in at north of 500bln pounds. This is an awful lot of money for the sake of saving a few thousand excess deaths. Of course, it’s hard to know how many people would have died, but at 0.3% mortality, which seems high, we’d be looking at maybe 200K deaths. So maybe the cost would be of the order of 2.5m pounds per life saved, or maybe ten times the threshold for an extra quality adjusted life year. Given that the median age of death is around 80, maybe in terms of QALYs it’s only 2-5 times the threshold. Whatever it is, it’s a big spend, but probably would be supported by most voters.
Chart for the day
Something happened in 2007 which killed UK productivity growth. That’s not everything, but in the long run it’s nearly everything. The future is bleak if this does not change.