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22 February 2018

Oh, John McDonnell


Dear Mr McDonnell,


Johnny, Johnny, Johnny! It’s not that long ago that I wrote to you and your friend Jez outlining some basic misunderstanding that you appeared to have when it comes to tax and international investment. You may recall that I said then that I was ready to help you if you encountered any other areas of economic thought that you had difficulty in grasping; yet here you go again, following a thought that doesn’t actually work, in the real world. (Just a small tip here, in parentheses; you have to deal with the world as it is, not as you would wish it to be. Nothing wrong with trying to change it, but you do have to start from reality, not fantasy.)

Anyway, I’m concerned that you are putting forward some inaccuracies in your expressed thoughts on the nationalisation of various industries. You are espousing the contention that there is no cost involved in taking assets away from their private owners and handing them to the state. You maintain that it is a simple swap of asset for money, and that the two balance each other out. Well, up to a point, one can see your logic. After all, if I go and buy an ounce of gold, I give the seller $1300-odd and he gives me the ounce of gold, which is valued at $1300 (since that’s what I’ve just paid for it), so the value of my financial position hasn’t actually changed. But you see, Johnny, there is a crucial difference between me and the state (and this is where you chaps on the communist/Marxist/Leninist/Trotskyite/ Maoist and so on left often go wrong - and, by the way, you do look silly on the Sunday morning political TV shows denying that you are a Marxist when anybody with internet access can find clips of you saying “I’m unashamedly a Marxist”) - and that difference is that I have the money with which to buy the asset, whereas the state doesn’t. I earn money from my work (although as I’ve always been a City trader, I suspect you think I shouldn’t, but that’s a discussion for another time). When I have earned the money, then it is mine to spend. But the state isn’t in that position; it can raise money, but it doesn’t earn it; and what it raises is for the purpose of maintaining the infrastructure of society. There are only two ways it can acquire money to spend; it can tax its citizens and corporations or it can borrow. You’ve already said that you would not be raising taxes to fund your buying spree, so we have to assume that you would finance it through borrowing.

Now here’s where you go wrong in your thinking. You are proposing - as I understand your remarks - that you will exchange the currently held equity in the target companies with “government bonds”; thus, you say, there will be no cost. Existing shareholders will have a bond in place of an equity and the government will have acquired the asset without having parted with any cash. Thus, you say, it costs nothing. Well, I’ll come to that in a moment, after a brief aside. You have also gone on record saying that the price of the assets will be “determined by Parliament, not the market.” I don’t believe you intend to pay more than the market price, so I can only interpret that as a veiled threat to take assets at less than their current market value. That would be nothing more than institutionalised theft. You can dress it up with whatever words you like, but the sanctity of private property ownership under English law goes back a very long way, arguably to the Magna Carta. For you to use a Parliament of your fellow-travellers to break that principle would be theft, as I say, and a betrayal of hundreds of years of honest people obeying the law. Incidentally, it would also cause international corporations to desert this country in droves - one of the biggest attractions for them is the English legal system; you probably don’t know that, looking at your career, but believe me, it’s true. 

Anyway, on with your proposal. Here we have to go into a little bit of detail about how financial markets work; I apologise, because I have a very strong feeling you don’t like this subject and neither do you really understand it, so I’ll keep it as simple as I can. Investors buy equities and bonds in search of income and/or capital appreciation. Think about that for a moment. You will have to pay them interest - what we call the coupon - in order to make them prepared to hold your securities. Now I know you claim you’re not borrowing, because you’re “just” issuing government bonds, but you have to understand that the simple act of issuing the bond is creating a debt - at some point, the bond has to be redeemed (undated stuff won’t cut it these days), so you will, or would, be increasing the stock of UK government debt - in layman’s terms, increasing the amount of money the UK government owes to lenders. 

So where you are going is that you will take away the equity investments from their owners and replace them with your newly-issued bonds. On those, you will have to pay interest and  - at some point - you will have either to repay or refinance. At the moment, the international markets are happy to finance UK government debt at pretty low rates. But once you start increasing it, they will demand a higher coupon, for the very simple reason that the more debt you have, the higher the default risk (that’s why sensible mortgage lenders have conservative loan-to-value ratios, as an example). The relationship between price and coupon of bonds is an inverse one - as the interest rate rises, the price falls: I’m going to assume you can work the reason for that out for yourself - it’s pretty obvious. So the value of those bonds you intend to give to former equity holders will go down; that’s not a guess, it’s a racing certainty, and I’ve been doing this a long time, unlike you. So you would begin by taking something at a lower than real price, and pay for it with a security almost certain to drop in value. Do you not think that that sequence of events will have a deleterious effect on the willingness of investors to put their money anywhere near a UK economy guided by you? You seem to slide around that by saying, “nudge nudge, wink wink, I’ve seen the accounts for the last few years and the amounts paid out in dividends will cover the cost, however high interest rates go.” Honestly, that is laughable. Nobody making such an open-ended statement should be allowed anywhere near the reins of any economy.  

And then we come to the shareholders. Now, some of them may be the evil capitalists you despise, but most of them are not. Most of them are pension funds (check the make-up of UK equity investment if you don’t want to take my word for it). Those pension funds represent the part of their earnings put aside by a huge swathe of your countrymen and women to enable them to live decently after their retirement. In blunt terms, your ideological obsession with a social and economic system which has never - I repeat, never - succeeded wherever it has been tried in the world, threatens to steal that decent life from them. 

Johnny, I doubt you and I will ever agree on much, but I really suggest you think things through - and maybe take some advice from those who know economics and financial markets better than you - before you make these outrageous claims. You’re doing nobody any favours, least of all yourself, by attempting to present hopes and dreams as facts; you’re falling into the trap of believing that because you want something to happen, it will, in defiance of reality.


Yours, more in sorrow than anger (although the anger builds each time you try to obfuscate and feed erroneous expectations to those too inexperienced to be able to refute them),


Lord Copper   


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