Comrade Gordon And Caliph Haroun

I feel obliged to respond to Jim’s comments on our dear leader, Gordon Brown.
Where can I start?  Brown seems increasingly like an ageing Communist-era despot, if his performance last week in Parliament is anything to go by…and it would be funny if things weren’t so serious.  For all our sakes, it would be good if his delusions of saving the world were stripped away as soon as possible.It is said that the ruler of Baghdad during its most glorious period, the Caliph Haroun al-Rashid (of Arabian nights fame), took the very sensible approach of distrusting his courtiers, and would tour his city at night in disguise, to hear what his people really thought of his rule.  I doubt Brown or his predecessor Blair (who lives under armed guard in London) would follow suit, but we can only hope.

Meanwhile the collapse of sterling since the summer, and the explosion of the UK’s budget deficit, revealed yesterday, suggest that urgent action is needed to restore confidence in the state’s finances.  It will be a very difficult task, but one that appears more pressing by the day.  Yet with close to, or over half the population on the government’s payroll in many parts of the country, cutting back state expenditures will be a very tough political task indeed.

And as you say, Jim, recent central bank and government actions smack of panic and desperation.  Hitting the population with zero interest rates in an attempt to stimulate borrowing may backfire – while banks are unlikely to return to easy lending policies, the downturn might even be exacerbated, as those with healthy finances will be forced to save more.

For the time being, investors are willing to lend to governments for free (at the short end of the yield curve), and for a couple of percent per annum at ten year maturities.  How long this state of affairs will last is anyone’s guess – and I was completely wrong to forecast a rise in US Treasury yields a month or so ago.  But on a ten year view I’d rather be holding real assets – gold, oil, land, equities or property – than government fixed rate debt.

And maybe I should consider junk bonds as well?  As you point out, Matt, bank insiders at Credit Suisse are paying themselves in some of the most beaten-up debt assets.  And, with John Paulson, who made billions shorting US mortgage-backed securities over the last two years, now having reversed course and started to buy, I completely agree with you that ETF investors should be allowed to join in.  Problems of illiquidity might make a traditional ETF structure tricky to set up, but why not – as you suggest – a swap-based structure or, dare I say it, an ETN?

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