Albert Edwards likes patterns: his shirts and the wallpaper in his house are decorated with bold, repeating motifs. He has been seeking them in markets and economic data for four decades, during which time he was voted the top strategist in the annual Extel survey of the investment industry for a record 15 years running. What’s made Edwards so popular is not that he’s always right but that he’s always unafraid to speak his mind.
As global strategist at Société Générale, the multinational French bank, Edwards offers the “alternative view” as a useful counterpoint to accepted thinking about economies and markets. “I’ve never minded being right out on a limb on a lot of a lot of different issues,” he tells me. His detailed predictions of a global recession in the summer of 2008 were an outlier during what many agreed was an economic boom; three months later he was fêted as someone with a knack for spotting icebergs.
One of the problems Edwards sees in the UK economy today is that a narrative has taken over – that Liz Truss crashed the economy, and Rishi Sunak and Jeremy Hunt have put it back in business – and a dangerous economic model, in which the central bank prints new money while the government keeps a fierce grip on its purse-strings, has been reimposed.
Edwards calls this combination of loose monetary and tight fiscal policy the “Davos Consensus”. It’s the successor, he says, to the Washington Consensus, the agreement among free-market neoliberals that trade liberalisation, deregulation, lower headline tax rates and privatisation were the route to widespread economic growth. After the 1997 Asian currency crisis the Washington Consensus “was told to get stuffed”, he says. In the ruins of the 2008 crash a new agreement was struck: a commitment to next-to-nothing interest rates, quantitative easing (QE) and low government spending that produced 14 years in which asset prices and inequality boomed, while real wages did nothing.
“Hosing QE into the economy wasn’t in my view particularly effective,” Edwards says, except at inflating the prices of houses and financial assets, some of which it was hoped would spill over into the real economy. It’s for this reason that, while he was by no means a supporter of Truss, Edwards was sympathetic to the central thrust of the short-lived prime minister’s economic position, which was that the post-2008 consensus between central bankers and governments hadn’t worked. “This has caused a lot of problems,” he says. “It’s caused inequality… it has caused intergenerational strife, especially in terms of house prices.”
It was, he says, “negligent” of central bankers to continue pumping new money into the financial system via QE when it was clear the policy was creating inequality, which fuelled populism, and a teetering edifice of illusory growth. “If free money was the route to economic prosperity, Argentina would be the richest country in the world by now,” he observes. “And, it’s not.”
As a top strategist at one of the world’s largest banks (SocGen is larger by assets than Barclays, Deutsche Bank or Goldman Sachs), Edwards is not someone you’d expect to criticise financialisation. But he says that while banks have been much more carefully regulated since 2008, QE encouraged the rest of the economy to load up on the kind of risk that had once been contained to Wall Street. “In the last cycle, it was the banks that blew up, but this time around the excess leverage will reveal itself elsewhere, in the real economy or the financial sector – as we’ve seen with the liquidity crisis in UK pension funds. The simple fact is when money is free, borrowers and lenders do stupid things.”
The pandemic, he says, made the impact of QE even more serious, because where before it had mostly inflated financial asset prices, stimulus packages meant the new money was injected “into the veins of Main Street, rather than Wall Street”. Given the obvious supply constraints created by Covid, “it didn’t take a genius to work out this was going to cause an outbreak of inflation”.
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Central bankers, however, have long “got away with blaming other people for their mistakes”, Edwards says. After 2008 the Bank of England’s failure to recognise the risks developing in Britain’s financial sector was played down and commercial bankers such as the Fred Goodwin, the chief executive of RBS, became the villains of the crash. This year, as Edwards sees it, the Bank was able to blame its failure to address the danger of “an economy and a financial system hooked on quantitative easing and free money” on the geopolitical situation, and on a new government that was already unpopular.
“They used the global financial crisis as an excuse to gut our public services”
There’s plenty of evidence to support the view that Truss and her chancellor Kwasi Kwarteng’s mini-Budget in September didn’t actually cause the disaster that followed. It’s true that the fiscal statement included a commitment to fund tax cuts through new borrowing, which the government does by selling bonds (known as gilts). It’s true that the Truss government failed to communicate its plans well or to produce economic forecasts, which Edwards describes as “one of those illusions [markets] like to grip onto”. But he points out that most of what the government was going to do was known weeks in advance, and priced in by investors.
It’s also true that the day before Kwarteng delivered the statement the Bank of England announced its own plan for quantitative tightening (QT), which also involves selling huge volumes of gilts onto the market, from the £841bn pile of gilts that it holds in its Asset Purchase Facility, to try to restrain inflation. As Edwards puts it, that meant “shovelling about the same amount into the gilts market which the tax cuts were going to be doing. If we were doing QE now and interest rates were close to zero, probably that Budget would have had absolutely no impact on gilts.”
Yet the narrative took hold. As during the post-2008 austerity programme, turmoil in financial markets – caused partly by a failure of regulation and government oversight – was used as an excuse for the imposition of a new political programme. “They used the global financial crisis as an excuse to gut our public services,” he says, his chummy demeanour becoming exasperated as he describes a country in which, even for someone in his position, “nothing works”. He waves his hands as he talks about the holes in the road, hospitals, the DVLA, the police – “nothing works!”.
But policymakers are now even more closely agreed that the government must avoid spooking the markets at all costs. Central bankers are “having to beat their chests”, he says, “like some WWF wrestler, trash-talking before a bout”, because having failed to prepare for higher inflation “what they perceive is that to restore their credibility, it’s better to overdo it” on raising interest rates and QT. In doing so, they are hammering the economy with more expensive debt at the worst possible moment.
“Everyone else is paying the price for their incompetence. Central bankers are telling individuals in the labour market that they should sustain a massive real wage cut, at a time when corporate profit margins have risen to a record high as a result of price-gouging… To drive the economy into recession, essentially to restore their credibility – as far as a lot of people are concerned, they had zero credibility in the first place!”
Meanwhile the government is squeezing fiscal policy at a dangerous moment. The “biggest bubbles” that QE has inflated – the housing market, technology stocks – are “imploding” in value, and still the government seeks to reduce its own economic activity. “Even George Osborne wouldn’t have tightened [fiscal policy] going into a recession. What Sunak’s doing is lunacy.”
“Everyone else is paying the price for their incompetence.”
Where will this lunacy take us? “The UK and US and Europe are all going into recession. I don’t think there’s any doubt about that. And I think it will be a deep recession,” he says. Policymakers will continue trying to normalise interest rates but “they can never achieve it, because the financial markets rudely interrupt them, collapse and trigger a recession”.
“No one under 40 will have experienced this house price crash that’s coming now,” Edwards says. “People should have an open mind about how bad this can get.” When the crash comes the only response central bankers will have will be to drop interest rates again, and to stop selling the trillions of dollars of government bonds that have accumulated on their balance sheets.
“We are in the first steps to the abandonment of QT,” he predicts. The UK’s gilt crisis was “the canary in the coal mine”, but something – some other over-leveraged part of the financial plumbing – will “blow up” in the US economy, and in Europe. The “big surprise” will be the collapse of headline inflation, below zero, next year – at which point policymakers will have the “excuse” to reduce interest rates and resume QE. But core inflation won’t drop as far, and it will return. Like Frankenstein, central banks will face “a monster of their own making” that will keep coming back, again and again. “The end product,” he warns, is “a decade-plus of terrible returns for financial assets, including housing.”
The only remedy, he says, is to learn from the mistakes of the past. “Pushing up asset prices on the back of free money is a failed policy. That’s what central banks have been pursuing deliberately, the Davos Consensus has encouraged that. The IMF’s cosy consensus is still there. It wants austerity. We’ve got to move away from that Hammond-Osborne, tight fiscal, easy money. You’ve got to move away from that policy mix. It’s failed, and it’s been a disaster.”
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