Covid-19 has murdered the global consumer, and Rishi Sunak’s scheme won’t survive either

Governments cannot create prosperity with printing presses, that’s called a Ponzi scheme. Paying people not to work as revenues crash, while inflating bubbles during an economic depression funded by ‘cheap debt’, will end badly.

Covid-19 is a killer. It has taken lives and has disrupted the main driver of economic growth: consumer spending. Corporate, government and personal debt have never been higher as unemployment hits record highs. Our globalized world has never seen such rapid across-the-board economic contraction, as evidenced by the UK's gross domestic product crashing a record 5.8% in March. This report illustrates the most rapid economic contraction since records began. RIP the UK consumer! Let's take a closer look at the UK's Covid-19 bailout plans to deal with this economic depression.

Not much of a plan

The UK's Chancellor of the Exchequer, Rishi Sunak, announced that the government will continue the furlough scheme until October. His plan was short on specifics, and sterling remained basically unchanged in the 1.23 middle range. Sunak's announcement was, as expected, vague, and he promised that the current 80% pay scheme, capped at £2,500 per month, will continue until the end of July. The only clarity from Sunak was that the government intends to keep the UK in lockdown until at least the end of July.

Furthermore, changes in this scheme covering the period from August-September are “yet to be announced”. It is a safe bet that, after July, it will become compulsory for employers to contribute to the funding of this scheme, which they cannot afford. Consequently, more businesses will have no choice but to close permanently and many of the 7.5 million jobs the government is currently supporting could be terminated once employers are required to contribute. The most likely scenario: unemployment will set new record highs as a tsunami of credit defaults and bankruptcies hits the UK.

And then we have all of Boris's 2019 campaign promises to pay for, such as the massively over-budget albatross known as HS2. The Guardian estimated the cost of that at £106 billion, but I bet the actual expenditure will be much higher. There’s also the promise of £34 billion more per year for the NHS and the tens of millions he promised to invest in science, schools, apprenticeships and infrastructure. Boris promised all this while saying he would “control the debt” and not raise the income tax rate, VAT or National Insurance.

While on the campaign trail, I challenged his ability to deliver on these promises and warned voters that the massive debt we had would cause a credit crisis. Money cannot be created out of thin air, so how will the UK fund these programs costing trillions? I never received answers then, and I certainly won't get any now. Funding debt with more debt did not work in Zimbabwe or the Weimar Republic, so why should it work in the UK?

Comatose markets are symptom

Even before Covid-19, markets had become entirely reliant upon central banks to “fix” downturns with quantitative easing (QE), bailouts and zero percent interest rates. Because public companies rely on central banks and the expectation that they are immune from insolvency, corporate earnings and economic fundamentals no longer matter. These central bank policies have enabled rampant moral hazard. Now, with Covid-19 having caused record unemployment, we are experiencing a global economic depression. Instead of “fixing” the problems, central banks are the financial arsonists who ignited this out-of-control, five-alarm fire.

Moral hazard has led many a sanguine millennial to wave their fingers at me, smugly admonishing: “You don't understand because valuations don't matter,” and “The Federal Reserve has my back”. In reality, this is almost as nonsensical as the extreme debt, credit and leverage our sleepy regulators have allowed zombie corporations to accrue since the Great Financial Crisis began in 2008. Since then, interest rates have dropped to lows not seen in 600 years. Did the magical thinking of the central bank wizards work? NO.

Japan's economy is the poster child for 30 years of economic stagnation. Thirty years of money printing (QE) and bailouts have spawned an entitlement call, which goes something like this: “I'm an investment banker, I'm too big to fail or jail. I can make large bets, and when they explode, the Federal Reserve will bail me out.” I am frightened by what I have been hearing, and you should be, too.

The markets have disregarded the scope, scale and magnitude of this global crisis, and nearly every asset class is grossly mispriced. Many NASDAQ stocks are trading at record highs as if Covid-19 never happened, no damage has been done to consumer demand or the economy, and we will see a V-shaped recovery. Take Apple shares, which have skyrocketed over 50% since March 23 with Apple's market capitalisation nearing a new record of $1.5 trillion, because everyone needs a NEW $1,700 iPhone and $4,000 MacBook Pro during an economic depression.

The bubbles will burst, and austerity will follow

The current Covid-19 work-related stoppages have not only decimated growth in developed nations, but they have also crushed the emerging markets. For example, India just announced that its year-on-year March industrial production plummeted 16.7%. Mexico's plummeted 20.6%. And it's not only India and Mexico – it's every nation. Most emerging market debt is denominated in US dollars and defaults are now a certainty. I can also predict an end of US dollar hegemony within the next five years.

Covid-19 has magnified the issue of job security; many of the existing companies that were surviving month-to-month will never re-open. The banks, which the public bailed out in 2008, will no longer be willing or in a position to extend credit to anyone. There are entire sectors in the economy that will disappear, such as property brokers and salespeople. The multi-decade property bubble in housing will see these overinflated house prices go POP! The UK and USA will need massive tax increases to fund these trillion-dollar pork-barrel spending bills magicked up out of thin air.

Covid-19 has killed consumer spending. It has caused an economic depression. Last week's UK gilt auction appeared to be debt monetisation. This is very dangerous and can get ugly quickly, as it did in Zimbabwe and the Weimar Republic. Central bank policies enabled moral hazard, which caused the widest wealth inequality gap in history. Now it seems that governments, without consultation, have adopted the insane policy of Modern Monetary Theory, aka ‘the Magic Money Tree’. I’m not sure why valuations remain in the stratosphere, but this is the biggest bubble I have ever seen. Next, the governments will look to ban all cash, because not only are negative interest rates coming, but bail-ins are next – just like what happened in Cyprus. Global stock markets are bubbles caused by the central bank liquidity period. Bubbles and Ponzi schemes both end the same way: badly.

This wave of the crisis has only just begun. The worst part is coming, and markets will crash. You have been warned; prepare now.

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