What goes around

What on earth does the march on Moscow by the Wagner mercenary group mean for Russia’s future?  If reports are to be believed many of the top Kremlin brass fled to their dachas such was the concern about how it was going to end. 

As a consequence, no doubt there will be Novichok being smeared over door handles in Belarus (or wherever Prigozhin is) as you read this, but the ease that he was able to get a relatively small band of troops to take over two Russian cities without much dissent will have been noticed by Putin’s enemies.

It shows that everything is cyclical which is ironic given the mercenaries have the same name as the composer of the famous ‘Ring’ cycle.  Russia is a country that has seen governments overthrown and revolution throughout its history.  Saturday showed that if there is to be a change in leadership, once more it is likely to be by force rather than at the ballot box.

At least here we do not have to worry about the Boys Brigade and Scouts creating an armed insurrection, but we are experiencing a cycle of a different sort in the West.  This is a good old interest rate cycle which the young amongst you will never have experienced before.  This version started in 2008 when the response of central banks to the financial crisis was to print money whilst dramatically reducing interest rates.  This continued until they reached virtually zero and in some areas turned negative. 

As it didn’t seem to be causing inflation, which it should have done, there was a growing consensus among economists that Modern Monetary Theory (that’s what it’s called and was previously on the fringes of economic thinking), was a panacea and the answer to all of our economic ills.  A few dissenting economists said we were simply storing up problems and were in effect kicking the can down the road, but they were poo pooed.

The free money went into overdrive in the pandemic when governments the world over paid people to do nothing, and in the first two months of Covid, globally $15 trillion of new money was printed (source – IMF), more than double the total cost of World War II in today’s money.  Well the battered can has now hit a brick wall and can’t be kicked anymore and we have to deal with the consequences.

We have probably all experienced some people’s behaviour at a function with a free bar.  Most people just drink as much as they normally would but there are others that, let’s just say, take advantage of the hosts’ generosity! 

Well the free money party is well and truly over, and those that overindulged (borrowed) the most are realising they are likely to suffer the mother of all hangovers.  I have sympathy for the bulk of those affected, however, there are definitely some individuals and companies that have been living well beyond their means and for them the doo doo is winging its way towards the fan.

The reality is it is highly unlikely we will see interest rates go back to where they have been for the last ten years.  This wasn’t normal - it was abnormal.  Instead the level they are at just now is likely to be the norm, and I am afraid anyone that needs them to go back to 1% to be able to continue with their current lifestyle, or continue trading, will struggle.

Higher rates are not a bad thing for everyone however.  Just like a teetotaller going ‘oh, great…’ when they hear there is a free bar, the zero interest rate environment was not beneficial for savers of which there are far more in the country than there are borrowers.  Now all of a sudden they are getting paid once more for depositing their hard earned cash in the bank.  Although it is well below inflation it is better than it has been for some time.

The irony is this will also benefit HMRC as of course you have to pay tax on interest earned above a certain level. This is £1000 for a basic rate tax payer, £500 for higher rate and £0 for additional rate payers. Additionally if your other income does not exceed your personal allowance you can get a further £5,000 tax free.  Therefore for couples where there is a difference in tax rates there could be a significant tax saving by having bank accounts in the name of the lowest taxed.

I suspect the people who do not have to complete a tax return are unaware that if their interest exceeds the amounts above they will have to declare this to HMRC and pay any tax due at the end of the tax year. As there is over £1.1 trillion in banks in the UK, the taxed interest will add quite a few billion to the government’s coffers and mean additional hassle for those that thought their days of dealing with HMRC were over. 

So we know who the winners and losers will be in our cycle. I suspect that this will not be known for a while yet in Russia.