Warren Buffett defends $334bn cash pile ... offers warning on U.S. stock market valuations24/2/2025  Buffett, 94, dubbed the Sage of Omaha, has a long track record of striking big deals but the high valuations in US stocks has curbed buying activity and led to stock disposals. The conglomerate’s cash pile to hit $334.2 billion at the end of 2024.
“Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities,” but not in marketable equities, Buffett wrote. “That preference won’t change. While our ownership in marketable equities moved downward last year from $354 billion to $272 billion, the value of our non-quoted controlled equities increased somewhat and remains far greater than the value of the marketable portfolio.” He added: “Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in equities, mostly American equities, although many of these will have international operations of significance.” Berkshire, led by Buffett for 60 years, has grown to become a $1 trillion conglomerate with dozens of businesses spanning insurance, rail and energy as well as stakes in some of America’s largest companies, such as American Express, Coca-Cola and Moody’s. Buffett’s 15-page annual letter was issued alongside fourth-quarter results, showing a record operating profit of $47.4 billion for 2024, up 27 per cent year-on-year, before its annual shareholder gathering in Omaha in May. Buffett, the world’s sixth-richest person with an estimated net worth of $149.5 billion, according to Forbes, said that “it won’t be long” before Greg Abel, 62, the vice-chairman of Berkshire, replaced him as chief executive and referred to his age and use of a cane, which he said was to avoid “falling flat on my face”. He also used his annual letter to warn on the importance of a stable US dollar, saying “paper money can see its value evaporate if fiscal folly prevails”. Alex Ralph at The Times 24th February 2025 https://www.thetimes.com/business-money/companies/article/warren-buffett-defends-record-334bn-cash-pile-99kf3dkkh
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 The Bank of England isn’t coming to save Rachel Reeves – no one is
Kate Andrews Economics Editor at The Spectator in The Telegraph Andrew Bailey has not exactly garnered a reputation for being ahead of the game. Nor is he known for keeping governments afloat. Yet a great deal of faith has been placed in the Bank this year: its control over interest rates is thought in some circles to be the make-or-break factor for Labour’s growth agenda. Many assume the Bank is going to ride in and save the Government from economic stagnation. But no one is coming to the rescue. Not the central bankers. Not anyone. The harsh reality was on display this week. The Monetary Policy Committee voted 7 to 2 to reduce the Bank rate to 4.5pc . Alongside that decision was a scathing assessment of the state of the economy. Rates may be coming down but inflation is set to peak at 3.7pc this year. The underlying pressures – mainly on energy prices – are thought to be temporary, it’s a painful reminder that the cost of living crisis Labour promised to tackle is not obviously improving. It’s a reminder of what has not been done, including Labour’s promise to cut energy bills by up to £300. The problem isn’t that this pledge hasn’t been delivered yet; the problem is that the Party has all-but dropped that pre-election promise, realising, perhaps, that their plans were never going to deliver such a reduction. Worse still are the Bank’s latest growth projections, which have been cut in half from 1.5pc this year right down to 0.7pc. Very slow and very steady rate cuts are necessary to create the right conditions for economic growth. But they are by no means sufficient. The Bank’s update this week makes that point with complete clarity. Rates can come down, but that does not mean the economy turns around. The economy is set to remain relatively stagnant for a while longer. The root problem is that the Government is not addressing the fundamental problems facing the economy, including the growth-crushing measures in the Chancellor’s first Budget. Speaking after the rates announcement, Bailey noted that the downgraded forecasts are, in part, a reflection of the bloated public sector, which has grown in size and shrunk in productivity. “It is fair to say we have seen an increase in public sector employment,” the Governor noted. “We haven’t seen a commensurate increase in measured public sector output.” Of course, it was this Government that decided to make its first big spending announcement one of inflation-busting pay rises for the public sector. A succession of ministers pinned their hopes on a belief that something, somewhere, would turn up to get the economy moving at faster pace, to deliver the kinds of output necessary to make public service funding sustainable. It never did, because that kind of magic fix doesn’t exist. And the more burdens you pile on employers with tax and regulations, the harder it gets. No small rate cut can undo all that damage.  With $102 Trillion of Global Debt in 2024 … It’s time to worry about Bond Yields
In 2024, global public debt is forecast to have reached $102 trillion, with the U.S. and China largely contributing to rising levels of debt. This marks a $5 trillion increase since 2023 alone. Looking ahead, debt levels are projected to increase faster than previously expected as government policies fail to address debt risks amid aging populations and increasing healthcare costs. Going further, rising geopolitical tensions could lead to higher spending on defense, adding strain to government budgets. [What would happen if NATO really does increase defense spending to 5% of GDP?] This great graphic from Visual Capitalist, shows government debt by country in 2024, based on data from the IMF’s October 2024 World Economic Outlook. As the world’s largest economy, the U.S. debt pile continues to balloon, accounting for 34.6% of the world’s total government debt. With over $36 trillion of government debt, U.S. debt is more than double the next highest country. Overall, net interest payments on the national debt soared to $892 billion in the 2024 fiscal year. By 2034, these costs are forecast to reach $1.7 trillion, with total net interest costs amounting to $12.9 trillion over the next decade. A rising mountain of debt and higher interest rates are among the primary factors driving up net interest costs. China, ranking second globally, holds 16.1% of the world’s government debt. Over the next five years, China’s debt to GDP ratio is projected to hit 111.1% of GDP, up from 90.1% in 2024. Going further, Chinese officials recently stated they are prepared to deploy stimulus measures to support the economy if Trump imposes sweeping tariffs on goods imported from China. As a result, China’s debt to GDP could rise even faster than current projections. India, ranked seventh globally, has amassed $3.2 trillion in debt, an increase of 74% since 2019. However, thanks to its strong economic growth and fiscal policies that are increasing government revenues, debt as a percentage of GDP is projected to fall gradually from 83.1% in 2024 to 80.5% by 2028. In Europe, the UK has amassed the most debt, about $3.65 trillion, equal to 101.8% of GDP. This is far higher than the regional average, standing at 77.4% of GDP in 2024. Europe has a lower debt to GDP than North America and the Asia-Pacific, but European budgets likely face increasing pressures looking ahead, due to sluggish economic growth, trade wars, and aging populations. With governments increasingly using stimulus measures to boost the economy, it poses a greater threat to fiscal sustainability. In order to stabilize debts, the IMF stated that major spending cuts and tax hikes are needed over the next five to seven years. https://www.visualcapitalist.com/102-trillion-of-global-debt-in-2024/  The bond vigilantes are back — and that’s no bad thing
Blaming Rachel Reeves’s budget for the rise in gilt yields does not fit the facts, but stronger productivity growth is vital as bond traders dog the government. David Smith : The Sunday Times 12th January 2025 The big economics story has been the increase in the cost of government borrowing, the yields on UK government bonds, or gilts. Ten-year gilt yields have risen to more than 4.8 per cent, their highest since early 2008, while 30-year yields have risen to 5.4 per cent, their highest since 1998. At the same time, the pound has weakened against a stronger dollar. Comparisons with the autumn of 2022, when Liz Truss was prime minister and there was a loss of control of fiscal policy, are silly. Although gilt yields are higher now than then, they are close to the level of short-term official interest rates, the 4.75 per cent Bank rate. We know what is driving the recent increase in gilt yields. It was thought that the biggest risk to the UK economy from Donald Trump’s election victory would be the direct effect of his decision to impose tariffs on imports from trading partners. Now it looks as though a bigger challenge is the indirect effect on the cost of government borrowing. The chancellor’s October 30 budget has a lot to answer for, but blaming it for the latest rise in gilt yields does not fit the facts. Market worries about the impact of the Trump presidency on US inflation have started to kick in, and UK yields have risen in lockstep with those in America. The other factor is the fear that faced with sticky inflation, the Bank of England, like the US Federal Reserve, will be slower to reduce interest rates. The sharp rise in UK government debt in recent years, from under £800 billion in 2009 to £2.8 trillion now occurred at a time of very low gilt yields. Quantitative easing (QE) by the Bank helped keep them low. Debt interest, which averaged less than £40 billion a year in the 2010s was not a worry. Now bond yields are up, QE has been replaced by quantitative tightening, pushing those gilts back into the market. Bond vigilantes are snapping at the heels of governments. Even before the latest rise in gilt yields, the OBR expected debt interest payments to average £112 billion a year between now and the end of the decade. Stronger productivity growth would transform the outlook for the public finances. Meeting the fiscal rules would be a breeze, not a close-run thing, and the relentless rise in debt, could be brought under control. https://www.thetimes.com/business-money/economics/article/the-bond-vigilantes-are-back-and-thats-no-bad-thing-cmcw2c20t [Bill Clinton’s chief strategist James Carville famously said: “If there was reincarnation, I would want to come back as the bond market. You can intimidate everybody.” The vigilantes are sending a warning to the incoming Trump administration and the Reeves Treasury at the same time. It’s a go slow on buying, not yet an outright strike].  Donald Trump is already recognising a dose of reality ...
Irwin Stelzer The Sunday Times 12th January 2025 Trump does make the transition knowing four things. First, that the recession some feared is unlikely. Friday’s jobs report showing the labour market added 256,000 jobs in December, and unemployment ticked down to 4.1 per cent. Second, shortly after taking the oath, it is more rather than less likely the Fed will announce a postponement of planned cuts in its benchmark interest rates. His reaction to that decision is likely to be volcanic. Third the bond vigilantes are saddled up. Fearing Trumpian deficits, they have been selling government bonds in such quantities that interest rates have risen to a level not seen since 2008. [Ten year treasury yields hit 4.76% at the end of last week.] Finally, he knows he will be facing doubts about the feasibility of his plans to cut deficits by raising revenue and cutting costs. He plans to renew his 2017 tax cut, expiring in 2026, and eliminate taxes on tips, pensions and overtime pay. He argues that a combination of new revenues from tariffs, and new cost-cutting efficiencies in operating the government, will offset revenue lost from the tax cuts. But few, if any, analysts believe that revenues from tariffs will offset revenues lost. Donald Trump is already recognising a dose of reality ... Bookies Betting On PM Farage ... "Oh Yes It Could ..." With A little Help from My Friends"9/12/2024  Tesla boss, Elon Musk is reportedly considering giving the Reform Party up to $100 million dollars after meeting up with Farage at Donald Trump's Mar-a-Lago home in Florida.
The odds on Farage becoming the next prime minister are tumbling as Starmer flounders and increasing numbers of voters talk about a clean break from the Labour - Tory duopoly. Money from Musk would help. JFK had once joked about receiving a note from Joe, his tycoon father: "Dear Jack, don't buy a single vote more than necessary. I'll be damned if I am going to pay for a landslide." For Elon Musk, who apparently gave almost $300 million dollars to support Donald Trump's election bid, to give Farage $100 million dollars for an election victory over five years would be "chump change". $100 million dollars in each year for five years would be a more significant investment. Enough to launch Nigel Farage into a much higher political orbit. A launch into a political hemisphere taking his career to the next level and into Number Ten. $500 million dollars, should be more than enough for an electoral landslide. The Tories and Labour averaged just over £40 million in revenues over the last ten years. For Elon Musk, it's not rocket science and much cheaper than space travel. In 2023 SpaceX planned to pump some $2 billion into a rocket programme in an effort to finally get Starship into orbit. I didn't get off to a great start. A rapid unscheduled disassembly featured in the initial attempt. Reform Transformed ... It goes without saying that any donation even approaching that size would be transformative for Reform. In 2024, Reform was a fledgling party lacking the manpower, apparatus and money of the major partners. It was the great good fortune of the Conservative Party that Reform's 4.1 million votes were spread too evenly to translate into many parliamentary seats in this year's general election. Reform averaged just one seat in Parliament for every 823,000 people who voted for them. The the Lib Dems, secured a seat for every 49,000 votes and the Tories one seat for every 56,000 votes. The result of the general election in July did not reflect voting reality. Labour won a landslide majority with only 34 per cent of the vote, winning over 400 seats. The two main parties combined won only 58 per cent of the vote but gained 532 seats. The Lib Dems gained 12% of the vote and 72 seats. Reform won 14% of the vote but only had five MPs elected. Professor Rob Ford of the University of Manchester highlighted the fact that Labour and the Conservatives were the top two parties in only 48 per cent of seats, down from 73 per cent in 2019. At the next election an insurgent party will be the incumbent or main challenger in most constituencies. Reform Catching Up ... Across the nine most recent polls, Reform has an average of 20 per cent of the vote, up from 14 per cent in the general election. Labour is on 28 per cent, down from 34 per cent at the election, while the Tories' share of vote has risen by just two percentage points to 26 per cent. "Reform will probably get 100 seats at the next election even without extra money," says one election strategist. "And if they get a substantial amount of money they will be able to run a much more targeted campaign based on the sort of data they don't currently have." The nightmare scenario for mainstream parties is that Reform gets its act together before the next election, builds a nationwide party machine, beefs up and professionalises its full-time staff and has the sort of money to equal or even outdo the other parties' advertising spend. Veterans of previous UK elections say that data, something Musk knows more than a little about, is the key weapon in 21st-century campaigning. This is where Reform could make up the most ground on the other parties. Reform UK certainly would know what to do with the money with professional help. Musk likes to use the direct messaging facility on X to communicate with his contacts, something he can do with Farage because they follow each other on the platform. Having Musk retweeting your messages, with his 206 million followers (or even Trump with his 95 million followers) cannot but help Farage. Reform is changing ... Farage has appointed businessman Zia Yusuf as chairman of Reform, with a remit to professionalise all aspects of the party, from candidate selection and vetting to building a network of party activists across the country. Zia Yusuf, said the party now had 105,000 members compared to around 130,000 for the Tories. "The stranglehold of the two old parties is finally broken," he said. History is being made in real time." Farage added"The hegemony is breaking. We are entering a new era of politics." According to a recent poll by "FindOutNow"" on the 4th of December, Reform has moved ahead of Labour for the first time, just two points behind the Tories. Conservatives polled 26%, Reform 24% and Labour 23%. At the end of a speech last week, Farage issued a warning to the great and good who were gathered in the audience. "At the next election in 2029 there will be hundreds of newcomers under the Reform UK label. We are about to witness a political revolution the likes of which you've not seen since Labour after the First World War." The Musk Money .. On the question of the Musk money, Farage was evasive. "I have neither solicited nor discussed a donation with Elon" but he said Musk backed him. He likes disruptors. "He's very supportive, he thinks Britain is going down the tubes. He thinks that Labour is leading us in a horrendous direction with the death of entrepreneurship and free speech. Farage pointed out, his association with Trump would prove a boon. "Whether people like him or not, a relationship with the most powerful man in the world is a plus not a minus," he said."A relationship with the richest man in the world is a real bonus." he could have added.  Headline CPI inflation picked up sharply to 2.3% in October, spooking markets and lowering expectations of a December interest rate cut. The jump marked a sharp increase from the 1.7% rise recorded in September, exceeding the 2.2% forecast of economists polled by Reuters. The latest data brings inflation back above the Bank of England's 2% target, dampening the prospects of a final interest rate cut this year. Core inflation, which excludes energy, food, alcohol and tobacco, came in at 3.3% for the month, up slightly from 3.2% in September. The uptick was due in part due to an increase in the energy price cap that took effect in October. CPI goods annual rate increased from minus 1.4% to minus 0.3%. Goods inflation continues to subsidise the headline rate. Price rises in the U.K.'s service sector ticked up to 5.0% from 4.9% in September, a major cause for concern for the MPC. Speaking before the Treasury Select Committee earlier this week, Governor Andrew Bailey said that inflation in the UK's services sector remained too high and was incompatible with bringing prices back to 2 per cent. The increase in minimum wage and the changes to National Insurance costs are likely to maintain price pressures into the New Year, especially in the service sector. The governor warned "The introduction of higher national insurance tax on employers poses uncertainty for future interest rate cuts." "The increase in employers' national insurance contributions announced in last month's budget was one of the biggest uncertainties ahead". "There are different ways in which the increase in employers' national insurance contributions announced in the autumn budget could play out in the economy," Bailey said. "If it raised the cost of employment and led to job cuts, it would soften the labour market and force the Bank to lower rates gradually", he said. "On the other hand, if the increase in costs was passed through to higher prices, the MPC would be forced to address the increase in inflationary pressure. The increase in employers' national insurance contributions could keep rates higher for longer." "A gradual approach to removing monetary policy restraint will help us to observe how this plays out, along with other risks to the inflation outlook." His warning came after major retailers wrote to the chancellor Rachel Reeves warning that shops will close, jobs will be lost and prices will have to rise because of the decision to raise employers' NICs in the budget. Economists estimate that future job losses will be in the range of 80,000 to 100,000 over the next five years.  The Bank expects inflation CPI to peak at around 2.8% in the third quarter of 2025 before returning to the 2% target in 2027. Market expectations of base rate trends have risen with six month gilts trading at 4.5%, ten year gilts trading at 4.4% at close of week.
The Bank's favoured OIS overnight swap rates are trading at 4.5% to 4.0% on a six month to ten-year spread. As of Wednesday morning, markets were pricing in just a 14% chance of a further quarter point cut this year. We expect a move to 4.5% as the next bank move but not until the end of the first quarter in 2025. Then not much more after that. Borrowing figures this week will do nothing to ease pressure on gilt yields. Thursday's ONS release revealed borrowing in the first seven months of 2024-25 was £96.6 billion. This was £1.1 billion above the same period last year. The year-on-year increase was driven primarily by higher central government spending, particularly departmental consumption expenditure and welfare spending. Strength in receipts compared to last year has offset a significant portion of the higher expenditure, the OBR said. Borrowing for the whole of 2024/25 is expected to be £2.4 billion higher than last year, £127.5 billion compared to £125.1 billion in 2023/24. The Debt Management Office will be looking to find a home for £300 billion of gilts, including roll overs, in the current financial year. Let's hope the kindness of strangers persists. The prospect of higher rates did nothing for Sterling this week. The Dollar bounce back continued, pushing the Pound to $1.25, down from the heady heights of $1.34 in September. The Euro cross rate closed at $1.04 as a Dollar push to parity comes into play. Bitcoin traded at $99,352 intra day yesterday. Maybe a tree (or a tulip bulb) can hit the sky ...  The Chancellor and the Growth Stats ... Three months into office and Rachel Reeves is dismayed by the performance of the economy. The Chancellor of the Exchequer is disappointed with figures showing the economy is flatlining in the months since Labour came to power. The chancellor promised "economic growth is at the heart of everything I am seeking to achieve". Official figures showed Britain's economy grew by just 0.1 per cent between July and September. "I want growth to come stronger and sooner" she said. "I am not satisfied with these numbers. Not when we consider the ONS had suggested the economy was growing at a "Gangbuster Rate" under the Tories at the start of the year. The Chancellor is missing the point, or rather the decimal point. The focus of the budget was clearly on bridging the fiscal deficit with a big surge on employment tax via the NI employers surcharge. The performance of the economy was always set to take second place. Not much in the budget to stimulate growth in the short term. Look into the detail of the GDP monthly estimate for September, released on Friday and maybe things ain't that bad. Growth year on year (our favoured measure GVA3) was up by 1% in the third quarter. It was up by just 0.2% in the first quarter and O.7% in the second quarter. So much for the "Gangbuster Growth" at onset. The Government could claim things are getting better under Labour but not by much. Assuming growth of 1.3% in the final quarter, that would generate an annual growth rate of less than 1% for the year as a whole. The economy will struggle to hit the OBR 1.1% forecast for growth this year. Heaven knows, or maybe the OBR model knows, how growth will hit the forecast growth of 2% growth next year. It could get better. Manufacturing and construction output was down by 1% and 0.4% in the latest quarter. Service sector growth was up by 1.5% with a strong performance in transport, storage, accommodation and food. Professional, scientific and technical services were up by almost 2%. Our scenario forecast is for growth of 1.0% this year and 1.5% next. Yes we all want growth to come stronger and sooner but want doesn't always get. The Governor of the Bank of England was in feisty mood his week at the Mansion House. Brexit had a negative effect on the British economy he said. Britain must rebuild relations with Brussels and warned of the economic consequences of Brexit. He also had a pop at the ONS and the job stats' "I am not happy with these numbers" he said.  The Governor and the Job Stats ... The Governor took a pop at the Office For National Statistics. The Chancellor may be disappointed with the growth stats, the Governor is disappointed with the job stats. "The UK's unreliable labour market statistics have become a "substantial problem" for the Bank of England. We are making interest rate decisions without accurate data on how many people are in the workforce", Andrew Bailey said. In a speech to City financiers at Mansion House on Thursday night, the Governor made his most pointed comments yet about the failure of the Office for National Statistics to collect enough reliable data on the jobs market. The UK's official statistics body is failing to get enough people to respond to its monthly Labour Force Survey, forcing the Bank to rely on alternative measures as it makes key decisions. "The travails of the Labour Force Survey are quite well known," Bailey said. "It is a substantial problem and not just for monetary policy. We don't know how many people are participating in the economy. It would help if across the country we were better at answering the phone when the ONS calls up." In response the ONS said "We advise caution, particularly when interpreting short-term change in the Labour Force survey, and encourage users to make use of a wide range of data sources where possible." Worrying isn't it. The latest figures suggest the unemployment numbers (000) increased to 1,486 in September. In August they had fallen to 1,386 from 1,487 in July. The unemployment rate increased to 4.3% in September from 4.1% in August and 4.2% in July. The Governor has a point. So how to make the forecasts accurately? The Bank forecasts the unemployment rate will hit 4.5 per cent in three years time. It does, however, acknowledge the danger of a bigger negative budget impact. "There is a risk that changes in the overall cost of employment for firms, including the increase in employer NICs and the national living wage, lead to greater cashflow constraints for some businesses, particularly SMEs" it said last week. The OBR, in fact, sees unemployment falling, not rising, because of the increase in public spending announced by the chancellor. "Supported by the temporary boost to demand from this budget, the unemployment rate falls from 4.3 per cent this year to 4.0 per cent in 2026 before returning to its estimated structural rate of 4.1 per cent in 2028," according to the latest economic and fiscal outlook. So why the big difference? The OBR forecasts growth of 1.8% in 2026. The Bank pencils in a more modest 1.25%. Confused? Don't be! Stay tuned to the Saturday Economist updates. Next week, we look at the forecasts for inflation and interest rates. Worth a closer look.  "A week can be a long time in politics", claimed Harold Wilson, now so much has happened in just the past five days. Despite two impeachments, four indictments and his new status as a convicted felon, Trump is set to return to the White House as the 47th President of the United States with Republican control of Senate and the House. Elected to a second term, the Republican has threatened to prosecute his political enemies, send the military into the streets of U.S. cities to target illegal immigrants, introduce mass deportation, impose 10% tariffs on U.S. imports, with a bonus 60% surcharge on imports from China. Many of the agencies central to the federal government will be purged of never Trumpers and replaced with loyalists. Trump advisers believe they wasted early opportunities in his first term, because they were unfamiliar with how to maximize central government power. They're planning a very different outcome this time. The Fed will be subject to Presidential influence on monetary policy, Fed Chair Jerome Powell may be sacked. In his first term, Trump called the Fed an "enemy" of the US and its officials "boneheads" and "pathetic". In August, he said of interest rate decisions: "I feel that the president should have at least a say in there. I feel that very strongly." Internationally, Trump will end the war in Ukraine and the Middle East and accelerate plans to open a Trump hotel in the Kremlin. He will test the commitment to NATO and encourage other member states to "cough up their fair share of costs." In the U.S. Musk and other millionaires and billionaires will ready for a feed fest of payback for election support. After pouring at least $130 million in a pro-Trump campaign effort, Tesla CEO Elon Musk is positioned to be paid back handsomely, it is claimed. More government contracts for Starlink. More support for Tesla in the fight back against Chinese EVs. SpaceX has received more than $19 billion from contracts with the federal government since 2008, including from NASA, the U.S. Air Force and Space Force. EVs imported from China will see their tariffs more than quadrupled from 27.5% to 100%, boosting sales prospects for Tesla.  No Nolan principles for the Trump regime. Selflessness, integrity, honesty, accountability and the rest will be tossed into the Rose garden, just behind the compost heap of objectivity and openness. Harris and her fellow Democrats warned during the election, a 248-year-old democracy is on the ballot, and the whole world is watching. The world readies for Trump 2.0. Fed Chair Jerome Powell has said he will not resign. "No", Powell said firmly on Thursday, when asked whether he would step aside, if Trump asked for his resignation. Powell has made it clear he's ready to defend the US central bank from political pressure saying he wouldn't resign if asked, insisting the president doesn't have the power to fire him or other senior Fed leaders. The governor of America's most populous state, California, says he will convene a special session of the legislature to protect state laws from Donald Trump. Gavin Newsom, said Trump's victory threatened the heavily Democrat state's values. "The freedoms we hold dear in California are under attack. We won't sit idle," he said. Other blue states are moving quickly to prepare game plans. In New York, governor Kathy Hochul said she, senior staffers and the attorney general plan to meet regularly to discuss legal strategies to protect "reproductive rights, civil rights, immigration, gun safety, labor rights, LGBTQ rights and our environmental justice". In the wider world, manufacturers in China are accelerating plans to relocate to Cambodia, Vietnam, Brazil and Mexico. China has warned there are no winners in trade wars, announcing a five-year package totaling 10 trillion yuan ($1.4 trillion) to tackle local government debt problems, signalling more economic support would come next year, to boost domestic consumption. British Foreign Secretary, David Lammy, has warned Trump against "hurting" allies with his tariff plan. The Foreign Secretary says "raising levies on foreign goods would not be in the medium or long-term interests of the US." Excellent. Sure to have the ear of the President, (the one not shot at) Lammy has previously described the President elect as "deluded, dishonest, xenophobic, narcissisti and a neo-Nazi sympathising sociopath". Trump may not be so ready to heed the Foreign Secretary's advice.  The Bond Vigilantes Are Watching ...
Trump in the end may be constrained by levels of debt and the bond vigilantes. The level of debt in the US has risen to $36 trillion dollars, tha's over 120% of GDP. Trump says he will renew his tax cuts, which are due to run out next year, at a cost of nearly $4 trillion for the next decade, as well as cutting taxes for companies further. That could double the deficit from its current level of 6 per cent to 12 per cent of GDP. His plans to raise tariffs to protect American industry and to kick out immigrants will push up prices further and damage growth. Rising inflation will force the Federal Reserve to raise interest rates, which will further increase the cost of government borrowing, which will further increase the debt. This week, the FOMC cut interest rates by 25 basis points. Markets had expected a further cut in December and more in 2025. Wall Street economists now see Fed policymakers keeping interest rates higher than they otherwise would have, given the likely inflationary effect of Trump policies. Nomura, for example, anticipate only one reduction in 2025, with monetary policy on hold until the inflation shock from tariffs has passed. Ten year bond yields have risen to 4.3% compared to 3.8% at the end of September. We still consider 4.5% ten year bond yields to be the benchmark in the new Trump expansionary era. In a quasi dictatorship, banana republic, the stakes would be even higher. What price the dollar then ...  We were promised a budget for growth. In reality it looked like a classic Labour Budget, taxes up, spending up, borrowing up. Debt set to average almost 100% of GDP, tax revenues set to hit 38% of GDP. Government spending set to average 45% of GDP.
The Prime Minister had promised to reach for the Growth Lever. Instead, the Chancellor grabbed the Tax Lever increasing the tax burden by a massive £40 billion. As for growth, the Office For Budget Responsibility suggested output would be little changed at the end of the forecast period. A sugar rush of government spending would generate a growth surge of almost 4% over the first two years of the plan. Thereafter economic growth would moderate to an average 1.5% over the period 2027 to 2029. Are the growth forecasts so bad? Growth in the UK was just 0.1% in 2023 and an expected out turn of 1.1% in 2024. Many commentators would settle for base line, non inflationary growth of 1.5% over the medium term. Should we place any reliance on the OBR forecasts more than two years out? Time will tell if the forecasts will be realised to any degree of accuracy. Too soon to hoist the Chancellor by that particular petard. Government spending on investment is set to surge by 6% in 2026 and by £100 billion over the next five years. The investment spending will boost growth. The problem it may take a stretch into a second parliamentary term to realise the real gains in National Income levels. Inflation CPI is set to increase to 2.6% next year and 2.3% in 2026, returning to target 2% by the end of the forecast period in 2029. Unemployment is set to average 4.1% over the five years. Moderate growth, low inflation and stable employment levels, what’s not to like? Spending Plans ... Chancellor of the Exchequer Rachel Reeves delivered a Budget to “Fix the Foundations of Our Economy.” It could have been called, “Mopping Up The Mess” of fourteen years of Tory mismanagement. The Government inherited a £22 billion Black Hole. In reality it was more like a £9.2 billion pothole. The incoming government had to tackle the problem of public sector pay, setting the issues of conflict with Junior Doctors and other NHS staff. Public Sector Net Borrowing was set to hit £120 billion this year, well before the Budget numbers revised the spending plans. The good news is the budget spending plans recognised the commitments to compensate the victims of two major public scandals. Some £11.8 billion will go to those impacted by the infected blood scandal and £1.8 billion will be paid to victims of the Post Office Horizon debacle. On day to day spending, the Red Book states “The Chancellor plans to protect public services as departments’ day-to-day spending is set to grow by an average of 3.3% in real terms between 2023-24 and 2025-26, including an increase of more than £22 billion for the NHS to help bring down waiting lists and £4 billion for the education sector to stop schools falling down. The Budget will provide a boost to public investment by over £100 billion over the next five years across roads, rail, schools and hospitals. Public Sector Investment will average 2.5% of GDP over the period compared to a planned fall to 1.7% under the Tories. Tax Hikes ... The Budget confirmed increased National Insurance contributions for employers, higher stamp duty on second homes, and the removal of the VAT exemption on private school fees. Passenger levies were also hiked on private jets. The budget’s biggest measure, the £25 billion rise in national insurance came under pressure from the IFS. “It will not get them anything like the £25 billion stated on the scorecard,” Paul Johnson said. “The OBR noted it will result in lower wages, lower hours and some job losses. This will reduce the amount raised from employer national insurance, employee national insurance and income tax revenues. Tom Peck writing in the Times claims the day after a budget, no one really cares anymore what the chancellor has to say. The only view that really matters is that of Paul Johnson, the head of the Institute for Fiscal Studies, who has for some years hosted a post-budget briefing. He sits in his corner office and systematically dismantles everything that was said the day before. If you were being gentle, you’d call it the budget’s elephant graveyard. Really it’s a budget abattoir. Budgets don’t fall apart, he rips them apart. “I’m afraid this looks like the same game playing we got with the last lot,” Johnson said. He gently pointed out that all the government departments who’ve been given 4 or 5 per cent budget increases this year, aren’t going to be placated by the projected 1 per cent increases thereafter. This, he said, was: “Pencilling in implausibly low spending commitments in the future, in order to make the arithmetic balance, repeating the same silly manoeuvres.” He pointed out that future projections also depended, for example, on ending the freeze on fuel duty, which has been in place since 2011, because no chancellor would dare. Not in a Happy Place … The Bond Market Vigilantes Look On … The Chancellor’s plans prompted an adverse market response, with ten year government bond yields rising to 4.5% yesterday before easing back to 4.4% at close of week. Hardly a Liz Truss moment but enough to set off tremors in the Treasury and raise fears of a Gilt Strike. Ratings agency Moody's said British finance minister Rachel Reeves' first budget will create new challenges to efforts to strengthen Britain's public finances, with the UK still facing muted growth, the Financial Times reported on Friday. While the NHS stands to benefit, other sectors face challenges. GPs, care homes, dentists, and hospices are pushing back against the National Insurance hike, while farmers worry about inheritance tax forcing them to divide family land. Rural communities are also questioning a 50 per cent increase in the bus fare cap. Hospitality and retail business are reeling from the 6% hike in minimum wage compounded by the increase in National Insurance. Business closures and job losses may follow. Chancellor of the Exchequer Rachel Reeves delivered a Budget to “Fix the Foundations of Our Economy.” Let’s hope so … The Bond Market Vigilantes Are Watching ... |
The Saturday EconomistAuthorJohn Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy. Archives
February 2025
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