In the Blind Spot (Ponzinomics, Mortgages, PayPal)

Markets, Business, Finance etc:

Google CEO has asked employees not to ‘equate fun with money’ in a sign that budgets are tightening.
Paul Mizen chairs a reflective talk on the 25 years of the Monetary Policy Committee attended by Mervyn King, Paul Tucket and Jagjit Chadh.
A contrarian thread by Paul Krugman on the oddities of the current sterling currency ‘crisis.’
Interview with Orano Peythieu on navigating the energy market in the midst of war.
The increase in energy prices is in danger of pricing out European recycling industries.
Gazprom earnings are up.
Hugh Hendry believes the Fed doesn’t know what it’s doing.
An increase in rates drives Halifax to withdraw all mortgage products that come with a fee.

There’s been a slew of UK mortgage lenders removing offers from the market since the mini-budget was announced last Friday. And yet, even now, the market seems stuck in a strange denial about the scale of the problem we’re facing. Moral hazard? Or something different?

On a personal and anecdotal level, I’ve had a number of friends and family reach out the past couple of days asking for mortgage advice. Overall, the average increase most are facing ranges between 3x and 5x what they’re currently paying. It’s simply not affordable. Thankfully, I myself bagged a 10-year just a few weeks ago. But it’s still painful.

The mood feels very similar to the weeks just before Covid lockdown. You will remember, we all knew something big was coming. But we were panicking because we couldn’t yet imagine how we could fund or maintain self-isolation. And then… out of the blue, Rishi Sunak introduced a whole new concept and word to us: furlough.

I think a similar thing will happen this time. There will have to be some sort of mass mortgage holiday instituted. One need only look to Ukraine and Poland for clues about what’s coming.

Poland (technically not at war) has already introduced a broad-brush credit holiday for mortgage borrowers underpinned by a law that will force banks to suspend mortgages or be fined. New mortgages have since collapsed. Ukraine, meanwhile, suspended mortgages when martial law was announced in February. The debt freeze funding that suspension was only finalised with international creditors on September 14.

Alas, despite the above, people still don’t get this isn’t just a regular recession or downturn.

Yes, lockdown is the root cause of all our problems. But things have now escalated beyond that into a war economy situation. The public is yet to be informed of this fact because, well, all nation states are currently committed to a game of chicken. Whoever first officially declares war on the other stands to look like the aggressor. Thus, even though all the war motions are underway, it’s unlikley anything will be properly verbalised for a while. Nonetheless, it’s impossible to read the situation any differently. For as long as we stand with Ukraine, this is the direction we are travelling in.

None of this is Reaganomics, however. Analysing Liz Truss’ budget from a war economy perspective is far more useful than applying 1970s or 1980s metaphors.

In that vein, it’s worth remembering all wars eventually have to be financed. (Ideally by someone other than the domestic population.) Truss’ big idea for financing the war effort, however, seems linked to a desire to emulate John Law’s 1716 plan to help France pay for its wartime debts. It is, in other words, a type of Ponzinomics.

But, as I noted on Twitter, this are fascistic elements in the plan to. None of which is out of the ordinary for a war economy. Populations tolerate fascistic economic systems that are leveraged to the eyeballs during wartimes because they’re supposed to be temporary and unwound as soon as peace comes.

Where the fascistic elements ring particularly true is in the concord Truss has engineered between corporates and states in the energy markets. This to me is a reminder of Mussolini’s Battle for Grain. As Wikipedia explains, this was “a propaganda campaign launched in 1925 during the fascist regime of Italy by Benito Mussolini, with the aim of gaining self-sufficiency in wheat production and freeing Italy from the “slavery of foreign bread”. Just replace grain with energy.

It’s important to stress none of the above is unique to Britain (even if in the UK the whole story has been hijacked by the Brexit debate). In fact, I’m going to argue there’s even a good chance that Britain — by frontloading the pain of the adjustment — might come out stronger than the rest of Europe for getting through the adjustment first.

And, as funny as it may be, I think it’s wrong to keep making the “UK is now an emerging market” joke. The truth I think is that Britain — thanks to still having a good chunk of self-generated energy and being a nuclear power — has a lot more going for it than many other European states right now. I think the bigger black swan will be a readjustment in our understanding of German financial resilience.

I’ll have more on the inevitable mortgage holidays to come in a subscriber note shortly. – IK

Politics, Politics, Politics:

Al-Jazeera on the ‘purge’ of pro-Corbyn supporters in the British Labour party.
Penetration of ex-Los Alamos laboratory workers by Chinese intelligence reveals scale of American counter-intelligence failures.
PayPal reinstates the accounts of Toby Young and the Free Speech Union.

This is another example of why KYC and AML laws are not fit for purpose. As I’ve written before, there are ambiguities in the counterterrorism component of the regulation (one man’s terrorist is another man’s freedom fighter) meaning it can be easily abused on a human rights level by governments and corporates pursuing their own agendas.