Tuesday, December 01, 2009

Could May 2010 be Feb 74?

Why is a hung Parliament a threat to be afraid of ?

The political pages have been awash with stories concerning the possibility that the General Election could result in a hung parliament, this is when no single party has a majority in the House of Commons.

This last happened in 1974. During the oil crisis endless political strikes by militant miners and dockers threatened to bring our democracy down. Ted Heath called an emergency election to establish 'who governs Britain'. The totally unexpected answer was: 'not you, mate'. Labour were returned to power as the largest single party though with a minority in the House, eventually going into a disasterous formal coalition with the Liberals in 1976.

The press have been full of speculation about a similar outcome when the election is held next year. The reason is a recent fall-off in the very large Conservative leads in the polls - from 17% to 10% or less in recent reports. Converting national vote shares into actual seat shares is very difficult in these days of target seats and the like but some pepsologists have suggested that the Tories need more than a 10% lead in the national polls to be sure of an overall majority, hence the speculation about NOC (No Overall Control).

The Liberal Democrats and the Nationalists in Scotland and Wales are dreaming of the goodies they will might extract if they hold the balance of power; but they are the only ones.

Everyone else is terrified.

No Overall Control is a turn of phrase that for most foreign exchange dealers and Gilt salespeople gives them nightmares even when times are good. When a Government like ours needs to borrow trillions from foreigners just to stay afloat the letters NOC equal the kiss of death.

In 2009 the Government has spent nearly 30% more than it has raised in tax, the difference this year - £180bn - has been covered by the sale of Government bonds (gilts) to investors. However all year the Bank of England has been printing new money (Quantative Easing) which it has spent buying up existing gilts, forcing investors to buy new ones from the Treasury.

QE is now ending and next years budget deficit will have to be financed without it. The funding crisis that a massive increase in borrowing like ours might have been expected to cause has simply been delayed by QE until next year.

If you add in the uncertainty of a possible hung parliament a currency and funding crisis early next year looks a real possibility. What this would mean is a loss of confidence from international investors needing drastic interest rate rises to lure them back, perhaps credit and currency exchange controls to stop British residents taking their wealth overseas and ultimately the possibility of our Government, like Russia a few years ago, not having enough money to pay it's own wages bill.

International investors will only lend money to a state that has a clear plan to repay its debts quickly. Because of the political chaos in 1976 we were unable to demonstrate this and the country instead had to turn to the IMF for emergency aid.

That fate looks unlikely to me, I don't agree with the pepsologists and I think a 10% Conservative lead will give us a workable commons majority and the mandate to make the changes that will maintain investor confidence.

I also think there is a paradox to hung parliaments: the possibility of having one makes actually ending up with one less likely.

No comments: