ALEX BRUMMER: As debt bubble fears mount the sooner the UK gets back to work the better
When Jeremy Corbyn and the Labour Party were proposing to go on a government spending spree ahead of last December’s general election there was much talk of a magic money tree.
The coronavirus emergency has meant that not just the UK government but all advanced economies have been required to grow money rainforests.
There is an assumption that there will always be buyers for government debt because of the need for banks, insurers, pension funds and the like to hold safe assets even if the returns are paltry and, in many cases, negative.
The coronavirus emergency has meant that not just the UK government but all advanced economies have been required to grow money rainforests
Moreover, if the private sector doesn’t step into the breach the central banks will save the day by buying bonds for cash.
But we shouldn’t kid ourselves that there will always be demand for government bonds. Britain’s Debt Management Office had a narrow escape on March 19 – just as lockdown was coming into view – when the bids for £3.25billion of gilts almost failed to find enough buyers.
The shortfall was only covered when the Bank of England called on the cavalry – an interest cut to just 0.1 per cent and the promise of up to £200billion of quantitative easing.
If we thought that the Government might have a problem, as the bills for furlough pile up, then look across the Atlantic.
The US Treasury has revealed that it will be seeking to raise $3 trillion (£2.4trillion) in the second quarter of this year.
That is a figure five times larger than any time in US history, and a sum almost the same size as the whole of the UK economy.
The scale of the fundraising reflects the scale of coronavirus rescue for the US economy launched by the White House in co-operation with Congress.
The conventional view in the US, as it is in the UK, Japan and elsewhere, is that this is fine because the Federal Reserve will act as a backstop by buying up what the private markets fail to absorb.
The Americans have extra freedom because, for most of the world, the US dollar is the reserve currency and there is very little choice but to keep the greenback in stock.
Unfortunately, the pound has no such buffers other than the Bank of England.
That is among the reasons that the sooner the UK gets back to work and fiscal exposure is limited, the less risk of setbacks in the gilts market and an unsustainable monetary explosion.
Sharing the spoils
Tim Steiner has stuck with it and created a great tech champion in Ocado.
Its value to great swathes of middle-income Britain has been demonstrated in the Covid-19 emergency when it has been overwhelmed with demand.
Chief executive Steiner and the Ocado board, headed by former M&S chief Stuart Rose, need to recognise that ill-constructed pay awards could lead to the grocery and tech company being branded the new Persimmon.
The housebuilder’s reputation was shattered by over-generous pay awards which drew attention to its failings as a seller of safe homes.
Royal London Asset Management says it will join the incipient revolt against Steiner’s £58.7million total pay and incentive award. Even in these times of a health and economic emergency no one begrudges Steiner and his executive team.
However, the gusher at the heart of the excessive awards, the ‘growth incentive plan,’ has been layered on top of the company’s variable pay scheme.
It is all the more embarrassing at a moment when unemployment is soaring, many chief executives (but not enough) have taken pay cuts and swathes of the workforce are on furlough.
Remuneration committee boss Andrew Harrison and chairman Rose need to impress upon Steiner his duty to show sacrifice. The cash would be better spent on the warehouse operators and the drivers who are a lifeline to many families.
Wake-up call
Lloyds Bank finally has discovered it can feel good to do the right thing.
In just 24 hours it has managed to make 32,000 loans to the value of £1billion to the smallest businesses under the Government’s ‘bounce back’ loans scheme.
That should ensure that many of these companies at least have a chance of surviving the lockdown.
Pity that it took a 100 per cent Government guarantee, a simplified application system and some discomforting feedback for it to see sense.
The Black Horse rides again.