Snapshots was reading about Viv Nicholson on Wikipedia. She was a Yorkshire housewife who became famous in 1961 when her husband won the football pools and told a reporter she would “spend spend spend!” She did exactly that and her rags-to-riches-to-rags story took her through sports cars, fur coats, jewellery, a battle with alcohol and bankruptcy. A photograph of Nicholson was used on the sleeve of the hit single “Heaven Knows I’m Miserable Now” by Manchester rock band The Smiths.

Spend Spend Spend!

Following the US mid-term elections, it is clear the fiscal agenda on both sides of the House is also to “spend spend spend”.  The Democrats want to do this with a large infrastructure-spending bill and Trump wants to do this with tax cuts for the middle classes. It is currently not clear how either will be financed and the US budget deficit is already stretched. 

British Chancellor, Phil Hammond, wants to increase spending on the National Health Service, which will in part be funded by bumper income tax revenues.  Italy is currently in a stalemate with the EU on its fiscal deficit plans. 

The decade after the GFC was characterised by monetary stimulus and fiscal austerity, we continue to move to an era of monetary withdrawal and fiscal stimulus in the developed world.

Crowding Out

It is not clear if deficit spending directly leads to inflation or higher government bond yields as there are multiple factors at play.  However, as we said in June, we think deficit spending will lead to crowding out of private sector debt by public sector debt and therefore elevated volatility on credit spreads will persist. 

Good luck.

Asif Godall
Co-Chief Investment Officer