“An honest politician is one who, when he is bought, will stay bought.”
Get your Free
financial review
Perhaps the most honest political speech ever given was that by the Labour Prime Minister James Callaghan to the Labour Party conference in Blackpool in 1976. It contained the following lines:
“’We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting Government spending.
“I tell you in all candour that that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.
“Higher inflation followed by higher unemployment. We have just escaped from the highest rate of inflation this country has known; we have not yet escaped from the consequences: high unemployment.”
For context, at the time the UK economy was suffering from a strange new malaise known as stagflation – a toxic mixture of high inflation, rising unemployment, and stagnant growth – all exacerbated by the 1973 oil crisis, which had caused a global recession and quadrupled energy prices. Inflation had peaked at around 27% in 1975 and remained in the mid-to-high teens in 1976. Unemployment was also high by post-war standards, and there were chronic balance-of-payments deficits. Industrial unrest, wage pressures, and a weakening pound added to the instability.
Under Harold Wilson, who was succeeded by Callaghan in April 1976, the Labour Party had pursued expansionary policies and a “social contract” with trade unions to restrain wages, but these proved insufficient to restore confidence. The outcome was a severe sterling crisis in 1976. The pound fell sharply from around $2.30 in early 1976 to roughly $1.65 by late September as investors lost confidence in the UK’s ability to manage its finances. The Bank of England’s foreign reserves were being rapidly depleted through interventions to support the currency, and there was a risk of a full-scale run on sterling (compounded by the so-called “sterling balances” – large foreign holdings that could be withdrawn quickly).
The government’s budget deficit was running at around 9–10% of GDP in 1975–76. For the financial year 1975/76 the central government borrowing requirement contributed to a sharp rise in national debt; estimates for 1976/77 had been around £10–12 billion before cuts. This level of borrowing was seen as unsustainable and was blamed for fuelling inflation and eroding market confidence.
Post-war welfare-state spending, subsidies, and recession-related costs had pushed public expenditure to high levels relative to revenue. Earlier attempts at restraint (including a public expenditure White Paper in early 1976) had been politically contentious and only partially successful.
The UK was importing more than it exported, and the falling pound risked making inflation even worse through higher import costs.
By mid-1976 the government had already sought some short-term international support (including a £10 billion standby facility from the Group of Ten central banks), but the capital markets remained sceptical. In September 1976, coinciding with the party conference, the crisis intensified. Callaghan’s government applied for a record IMF loan of $3.9 billion (then the largest ever requested from the Fund; equivalent to roughly £2.3 billion at the time). The loan was formally negotiated and a Letter of Intent signed on 15 December 1976. In return, the IMF demanded significant public spending cuts (around £2.5 billion over two years), higher interest rates, and monetary targets to control domestic credit expansion and inflation.
Callaghan’s speech publicly acknowledged the end of the post-war Keynesian era and prepared the ground for the austerity package, and monetarism, that followed.
As the discredited and rightly vilified Starmer administration limps on towards its Waterloo, one might think that the very concept of tax and spend, and of centralised economic management by the State, had been consigned to the dustbin of history. One would be wrong. And so ‘The Financial Times’ of 5th May 2026 carries a depressing article entitled ‘Loyalists urge PM to ‘tax for growth’’:
“Sir Keir Starmer must embrace “taxing for growth” and an expansion of state-subsidised jobs to improve living standards, a member of his government has argued.
“Jeevun Sandher, an aide in the business department, has set up a regular policy discussion programme for loyalist MPs designed to offer ideas to a government he said needed to be “more courageous” to win back voters..
“Sandher.. entered parliament in 2024 after a career as an economist in government and think-tanks..”
That last line is the clincher. One of the more obvious reasons why the country teeters on the brink of yet another sovereign debt and currency crisis is that nobody in government has any real world business experience; we are being ruled by misguided policy wonks.
As usual, Churchill got there first:
“I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
A variation on this quotation first emerged in a speech at the Free Trade Hall in Manchester on 19th February 1904. Perhaps Jeevun Sandher should have read some British political history as opposed to Economics and Philosophy at Nottingham. (Needless to say he was also a Young Fabian.)
If you accept our central thesis that the single biggest problem facing the world economy today is a monstrous overhang of government debt, you will also have to accept that there are only three ways of dealing with it. One is to ensure sufficient economic growth to service the debt. McKinsey’s conclusion from a recent study of the sovereign bond market is stark:
“We find it unlikely that economies with total non-financial debt that is equivalent to three to four times GDP will grow their way out of excessive debt.”
McKinsey are being almost coy. What they describe as unlikely may well be impossible – certainly within the UK and the euro zone, which both now look like they are trapped in a deflationary trap of zero growth.
The second way of dealing with an unserviceable debt load is to default. Or, we could call it “restructuring”, or perhaps the more palatable-sounding “debt jubilee”, but it amounts to the same thing.
The desirability of extinguishing debt is subjective. What is one person’s liability is another person’s asset. By reducing (or eliminating) the liability, you impoverish (or make destitute) the investor. A widespread government debt default would have the unhappy outcome of bankrupting the global pension fund industry, and probably most banks into the bargain.
Which brings us to option number three. Option number three just happens to be the time-honoured way in which every heavily indebted government throughout history has dealt with the problem of too much debt.
Inflation.
Which is, in turn, why every major central bank has experimented with some form or other of quantitative easing since the Global Financial Crisis. The purpose of quantitative easing – the printing of electronic money, out of thin air, by central banks, which is then used to buy predominantly debt assets from commercial banks – is to stimulate inflation.
The crowning irony of this ‘new subnormal’ financial world is that all the great experiments with quantitative easing have failed at their primary objective.
A crisis triggered by the build-up of too much debt has been met with even more borrowing. We are told – by dishonest politicians – that we live in an age of austerity and deleveraging; that governments are making every effort to pay down their debts.
The reality is anything but. The message from the McKinsey Global Institute is sobering. After the 2008 financial crisis, and the deepest global recession since the Second World War, it was widely forecast that our major economies would delever, and pay down their debts.
Nothing of the sort has happened.
What was unpayable back in 2007 is even more unpayable now.
Which outcome we get – of options 1, 2 or 3 – depends on the strength of your faith in central banks (or for that matter, the lack of it).
The question we really need to answer is: can a concerted central bank create inflation in a fiat currency world ?
Nobody could accuse the central banks of not trying hard enough.
Which accounts for the surreal world of the bond markets today.
So why are investors buying bonds that are virtually guaranteed to lose them money if held to maturity ? You’d have to ask them. We suspect it comes about through the triumph of good old-fashioned agency risk over market forces: most institutional bond fund managers have no skin in the game.
As for us, we’re backing real assets over paper ones (notably shares of sensibly priced commodities companies), and avoiding government debt entirely. And since we own the same things that our clients own, at least nobody can accuse us of maintaining conflicts of interest.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and real assets, and also in systematic trend-following funds.
“An honest politician is one who, when he is bought, will stay bought.”
Get your Free
financial review
Perhaps the most honest political speech ever given was that by the Labour Prime Minister James Callaghan to the Labour Party conference in Blackpool in 1976. It contained the following lines:
“’We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting Government spending.
“I tell you in all candour that that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.
“Higher inflation followed by higher unemployment. We have just escaped from the highest rate of inflation this country has known; we have not yet escaped from the consequences: high unemployment.”
For context, at the time the UK economy was suffering from a strange new malaise known as stagflation – a toxic mixture of high inflation, rising unemployment, and stagnant growth – all exacerbated by the 1973 oil crisis, which had caused a global recession and quadrupled energy prices. Inflation had peaked at around 27% in 1975 and remained in the mid-to-high teens in 1976. Unemployment was also high by post-war standards, and there were chronic balance-of-payments deficits. Industrial unrest, wage pressures, and a weakening pound added to the instability.
Under Harold Wilson, who was succeeded by Callaghan in April 1976, the Labour Party had pursued expansionary policies and a “social contract” with trade unions to restrain wages, but these proved insufficient to restore confidence. The outcome was a severe sterling crisis in 1976. The pound fell sharply from around $2.30 in early 1976 to roughly $1.65 by late September as investors lost confidence in the UK’s ability to manage its finances. The Bank of England’s foreign reserves were being rapidly depleted through interventions to support the currency, and there was a risk of a full-scale run on sterling (compounded by the so-called “sterling balances” – large foreign holdings that could be withdrawn quickly).
The government’s budget deficit was running at around 9–10% of GDP in 1975–76. For the financial year 1975/76 the central government borrowing requirement contributed to a sharp rise in national debt; estimates for 1976/77 had been around £10–12 billion before cuts. This level of borrowing was seen as unsustainable and was blamed for fuelling inflation and eroding market confidence.
Post-war welfare-state spending, subsidies, and recession-related costs had pushed public expenditure to high levels relative to revenue. Earlier attempts at restraint (including a public expenditure White Paper in early 1976) had been politically contentious and only partially successful.
The UK was importing more than it exported, and the falling pound risked making inflation even worse through higher import costs.
By mid-1976 the government had already sought some short-term international support (including a £10 billion standby facility from the Group of Ten central banks), but the capital markets remained sceptical. In September 1976, coinciding with the party conference, the crisis intensified. Callaghan’s government applied for a record IMF loan of $3.9 billion (then the largest ever requested from the Fund; equivalent to roughly £2.3 billion at the time). The loan was formally negotiated and a Letter of Intent signed on 15 December 1976. In return, the IMF demanded significant public spending cuts (around £2.5 billion over two years), higher interest rates, and monetary targets to control domestic credit expansion and inflation.
Callaghan’s speech publicly acknowledged the end of the post-war Keynesian era and prepared the ground for the austerity package, and monetarism, that followed.
As the discredited and rightly vilified Starmer administration limps on towards its Waterloo, one might think that the very concept of tax and spend, and of centralised economic management by the State, had been consigned to the dustbin of history. One would be wrong. And so ‘The Financial Times’ of 5th May 2026 carries a depressing article entitled ‘Loyalists urge PM to ‘tax for growth’’:
“Sir Keir Starmer must embrace “taxing for growth” and an expansion of state-subsidised jobs to improve living standards, a member of his government has argued.
“Jeevun Sandher, an aide in the business department, has set up a regular policy discussion programme for loyalist MPs designed to offer ideas to a government he said needed to be “more courageous” to win back voters..
“Sandher.. entered parliament in 2024 after a career as an economist in government and think-tanks..”
That last line is the clincher. One of the more obvious reasons why the country teeters on the brink of yet another sovereign debt and currency crisis is that nobody in government has any real world business experience; we are being ruled by misguided policy wonks.
As usual, Churchill got there first:
“I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
A variation on this quotation first emerged in a speech at the Free Trade Hall in Manchester on 19th February 1904. Perhaps Jeevun Sandher should have read some British political history as opposed to Economics and Philosophy at Nottingham. (Needless to say he was also a Young Fabian.)
If you accept our central thesis that the single biggest problem facing the world economy today is a monstrous overhang of government debt, you will also have to accept that there are only three ways of dealing with it. One is to ensure sufficient economic growth to service the debt. McKinsey’s conclusion from a recent study of the sovereign bond market is stark:
“We find it unlikely that economies with total non-financial debt that is equivalent to three to four times GDP will grow their way out of excessive debt.”
McKinsey are being almost coy. What they describe as unlikely may well be impossible – certainly within the UK and the euro zone, which both now look like they are trapped in a deflationary trap of zero growth.
The second way of dealing with an unserviceable debt load is to default. Or, we could call it “restructuring”, or perhaps the more palatable-sounding “debt jubilee”, but it amounts to the same thing.
The desirability of extinguishing debt is subjective. What is one person’s liability is another person’s asset. By reducing (or eliminating) the liability, you impoverish (or make destitute) the investor. A widespread government debt default would have the unhappy outcome of bankrupting the global pension fund industry, and probably most banks into the bargain.
Which brings us to option number three. Option number three just happens to be the time-honoured way in which every heavily indebted government throughout history has dealt with the problem of too much debt.
Inflation.
Which is, in turn, why every major central bank has experimented with some form or other of quantitative easing since the Global Financial Crisis. The purpose of quantitative easing – the printing of electronic money, out of thin air, by central banks, which is then used to buy predominantly debt assets from commercial banks – is to stimulate inflation.
The crowning irony of this ‘new subnormal’ financial world is that all the great experiments with quantitative easing have failed at their primary objective.
A crisis triggered by the build-up of too much debt has been met with even more borrowing. We are told – by dishonest politicians – that we live in an age of austerity and deleveraging; that governments are making every effort to pay down their debts.
The reality is anything but. The message from the McKinsey Global Institute is sobering. After the 2008 financial crisis, and the deepest global recession since the Second World War, it was widely forecast that our major economies would delever, and pay down their debts.
Nothing of the sort has happened.
What was unpayable back in 2007 is even more unpayable now.
Which outcome we get – of options 1, 2 or 3 – depends on the strength of your faith in central banks (or for that matter, the lack of it).
The question we really need to answer is: can a concerted central bank create inflation in a fiat currency world ?
Nobody could accuse the central banks of not trying hard enough.
Which accounts for the surreal world of the bond markets today.
So why are investors buying bonds that are virtually guaranteed to lose them money if held to maturity ? You’d have to ask them. We suspect it comes about through the triumph of good old-fashioned agency risk over market forces: most institutional bond fund managers have no skin in the game.
As for us, we’re backing real assets over paper ones (notably shares of sensibly priced commodities companies), and avoiding government debt entirely. And since we own the same things that our clients own, at least nobody can accuse us of maintaining conflicts of interest.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and real assets, and also in systematic trend-following funds.
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