Man in a mask, running

Its VE day all over again – sometimes victory is not all it seems.

The old film footage of the VE day celebrations currently on the television are moving and very engaging. The happiness and optimism are tangible. What is somewhat sad however, is, that despite the huge achievement in defeating Germany, the reality was that the future was not going to be what it had been prior to the war. Nothing went back to normal. If the happy crowds expected a return to what had been before they were going to be disappointed.

This knowledge, that we have with hindsight, and that the happy crowds could not possibly know, give all the films a sense of melancholy.  The UK came out of the war with damaged industries and huge war time debts. These war time debts were then added to in the creation of the Welfare State. In a couple of decades, the Empire was gone, and while this may well have been a good thing in itself, there was a sense that Britain was somewhat diminished. From leading the world in so much in the 19th Century the First and the Second War led to us handing on the baton of world leadership to the United States. The state control and regulation that has been necessary in both wars never retreated fully and left us with an economy that had lost its ability to be dynamic and innovative. What we faced after the Second World War was three decades of decline (certainly relative decline) which ended in the truly awful 1970s.

While the current situation is not as significant as the Second World War there are notable parallels. The case for a significant involvement of the government in our lives, and in the economy, had been growing prior to this crisis (mainly from environmentalists) and now seems unassailable. Levels of national debt are growing enormously, almost as if we are in a war. On top of this there is a strong sense that, after this crisis is over, government should be spending a lot of money on all sorts of things.

Few, if any, politicians would dare to suggest that austerity is the right policy after the virus disappears. Especially as the end of the austerity from the last crisis had only recently been declared to be over. We are certainly on a path for more and more debt and more government directed investment. It is also possible that taxes on the wealthy and on corporations may be on the way up.

The route to the 1970s is clearly open to us and it seems to be a path that many in society want to take. From an investment perspective this means that, if true, things are going to be challenging. Inflation could be higher than expected and corporate dynamism and profitability could be diminished. Normally in the middle of a crisis it is easy to be positive, and while further asset price recovery is possible, we may be entering a period that is not the same as the one prior to the crisis.

Debt will be a major drag and could even cause a genuine crisis in Southern Europe, something that would certainly affect us. Relations between the West and China already look strained and could worsen. Post the end of the crisis if there is a series of large environmental spending projects this will probably lead to a decline in return on investment for society as a whole. The case for these sorts of investments may well be legitimate, but they will almost certainly be a drag on the economy as a whole. The arguments for such spending are not very different to the arguments and effects of the establishment of the Welfare State after the Second World War.

Once this is all over celebrations much like those in 1945 are possible, likely even. However, as in 1945, the euphoria had, sadly, to give way to a sober reality, that things were different. That there has been a real cost in achieving victory. We could avoid going down the road to a new 1970s but we would have to make some tough decisions to do so, and, at the moment, the wind appears to be blowing in only one direction. A careful and sober minded approach to investment will be more important than ever.