Politicians - the great new investment risk
We have touched on this previously, but feel it needs a further airing as the political temperature is clearly rising throughout Europe and beyond, and political risk is very dangerous.
For most of the time since the 1980s we have been able to avoid trying to understand political shenanigans. That changed from 2008, because politicians in developed economies took on vast amounts of debt with, in most cases, no mandate from voters to do so.
Following major recessions in earlier decades, renewed economic growth (and inflation) typically rescued politicians, central bankers, and regulators. Not this time. Growth is feeble, and might be on the verge of failing.
To try and reduce these debts, governments are introducing austerity measures, raising taxes, cutting benefits, cutting pensions and salaries, sacking State workers. These are very advanced in places like Greece and Ireland, and there is real pain being felt by voters and taxpayers.
This time last year we highlighted a new dimension – ageing voters who disproportionately rely on State benefits. This is where the “two D’s” collide - Government debt or deficits and demographics.
To get Government deficits down effectively requires cutting the benefits and pensions of the retired and soon-to-be-retired. But demographics are such that this hits the most significant phalanx of ageing voters - are the politicians going to commit suicide? Time will tell, but in the meantime there are going to have to be some very grown-up conversations with voters.
This is the profile of the wealthier developed economies. In many emerging markets it is the opposite problem, with many countries having 40-50% of their populations aged under 25. While middle aged civil servants strike in the UK over reductions in pensions, younger people put their lives at risk for democracy through North Africa and the Near East.
While the latter young populations bravely struggle for democracy, for Trichet (head of the ECB) and the European authorities, democracy is an inconvenience. For example, the thin green line of Irish voters has not yet broken, and the government remains pro-European for now. But that might not last.
Throughout Europe, mainstream parties are already being routed. In Spain the ruling Socialist Party was crushed in regional elections, and the former Communist Party saw a significant rise in support. Revolting Greek voters and taxpayers are on our TV screens daily. In Germany not only is the party of Angela Merkel being badly mauled in local elections, but according to one Der Spiegel columnist an alarming number of Germans are falling victim to right wing populism
In France, the daughter of Jean-Marie Le Pen, Martine Le Pen, is now not only leader of the National Front, but also ahead of Nicolas Sarkozy in the polls for next years’ Presidential elections.
In the US, voters and taxpayers are not just increasingly aware that the boom years since the 1990s were a fiction built on debt, but also that there was little benefit to most of them. For example, after allowing for inflation, the average worker has not had a pay rise in almost 15 years - in fact for the last decade they lost 5%! Yet they will now be required to pick up the tab (through benefits being cut, taxes rising, persistent public sector redundancies).
After a few wrong turns and huffing and puffing we are ultimately optimistic the Americans will sort these problems - as Churchill said “You can always count on the Americans to do the right thing - after they have tried everything else”
Less optimistically, unless Trichet soon acknowledges and deals with what everyone knows to be the truth, his destiny might be to deal with Gerry Adams, Martine Le Pen and a Greek (or Portuguese) Colonel.
No spreadsheet can adequately quantify a self interested politician’s tendency to stupidity.
(Taken from TopFunds Guide July 2011)