Without immigration, it’ll have to be inflation

In today’s Issue:
• Organic taxpayer farming has failed
• Taxes, lies, statistics and death
• Why inflation had better be back, for good

Dear Reader,

For thousands of years, population growth bailed out government largesse.

It didn’t really matter how badly civil servants misspent the impossible amounts of money they borrowed. We’d eventually have enough taxpayers to shoulder the burden. It was only ever a question of time.

We could afford to fight the Napoleonic Wars, safe in the knowledge that by the time George Osborne repaid the last war debts in 2015, our population would have grown fourfold.

World War II was affordable given the huge Baby Boomer generation would shoulder the burden.

And funding public works like bridges and tunnels with government debt made sense given how many future taxpayers would be using them. Heck, even a bridge to nowhere is fiscally sound if your population growth is fast enough.

But, for the first time ever, this population-pyramid scheme is coming to an end. Populations are set to peak and decline.

Take a closer look and it’s far worse than that…

Working-age populations will fall much sooner than overall population. While retirement abruptly turns peak taxpayers into long-term welfare recipients. And rising life expectancy means long retirements with lots of healthcare costs.

So, the ratio of taxpayers to welfare recipients will spike as the former declines and the latter surges. And it’s that ratio which really matters, not the absolute numbers.

Without population growth, resolving the government debt burden won’t be a question of time any longer.

It’s now a question of policy.

How to pay for welfare without enough taxpayers

One option is immigration. At least, it was thought to be…

If you can’t grow enough organic taxpayers, why not just import them?

It sounds simple enough. Unfortunately, civil servants can’t even get immigration policy right!

If you want to benefit from immigration, you need law-abiding immigrants who are likely to assimilate, won’t go on welfare and will get jobs that are highly productive. Instead, we opened the doors to exactly the opposite.

If the UK had an open border policy with the likes of Japan, Canada, Australia, Korea, Taiwan and New Zealand, it may well have achieved the results Treasury was modelling for.

Instead, economists now claim that immigration is a net cost to the government. As though the type of immigrant is not the deciding part of the equation.

It was obvious at the outset what the fiscal consequences would be for the people we did let in…

If you don’t believe me, check out what the Japanese ambassador to the UK has been up to. We could’ve had hundreds of thousands of people like him living, working, exemplifying and extolling the virtues of the UK. My sisters in-law would’ve been two of them.

The failure of immigration to be a fiscal and economic tailwind is not because immigration is bad. It is because we let in “bad” immigrants.

Voters can’t tell the difference. Now that voting populations are turning on immigration, even left-wing politicians are growing keen to crack down.

But have they done the maths?

Without organic population growth and mass immigration of productive taxpayers, how are we going to keep a lid on government debt?

Before I give away the answer again (it’s included in the title), there’s something important you need to understand…

Taxes, lies, statistics and death

At the heart of this issue is the debate between real GDP, nominal GDP and GDP per capita.

After foisting high immigration on the UK in the name of goosing overall GDP, fashionable economists are now pointing out that it is GDP per capita that really matters. And immigration doesn’t necessarily improve GDP per capita.

By paying attention to GDP per capita instead of GDP itself, you reverse a great number of conclusions you might reach from economic statistics.

Japan’s GDP growth has been poor. GDP growth per capita has been very good.

Australia’s GDP growth has been good. GDP growth per capita very bad.

The IMF expects UK GDP growth to be high and GDP per capita to be very low.

If you wanted to ask how the country has performed since Brexit, picking and choosing between GDP or per capita GDP would allow you to come to whatever conclusion you like.

That’s the magic of modern-day statistics and economic data. There’s so much of it that you can claim proof of just about anything.

But there is one context in which GDP definitely matters more than GDP per capita: the capacity of government to pay debt.

That’s because the debt load doesn’t care what a country’s GDP per capita is. It only cares about the government’s capacity to pay the total debt. This is measured by the country’s total GDP.

Thus, the intellectual revolution to discover that GDP per capita matters more than GDP itself has taken place at precisely the wrong time. We’ve finally figured out that GDP per capita is a far better measure of prosperity, just when total GDP is about to become what matters most because our national debt is so dangerously high.

Ironic.

Why inflation had better be back

Back in 2020, I first warned readers of The Fleet Street Letter that a wave of inflation was coming for the UK after COVID. The reason was simple. It’s the only way to cut this much government debt.

With sensible immigration and population growth looking rather unlikely, there was only one option left.

By deliberately reducing the value of money, the debt we owe becomes less of a burden. That’s because the debt is expressed in a fixed amount of money.

You see, it’s not just GDP that’s crucial for measuring a country’s ability to repay debt. It’s nominal GDP. Meaning GDP unadjusted for inflation.

Again, this goes against what people are used to hearing. For most things we want to measure, real GDP is the key. Real GDP measures stuff, instead of money. Meaning it’s adjusted for inflation.

Imagine an economy that repeats last year’s performance precisely, right down to the amount of pies consumed. If prices go up 5%, nominal GDP goes up 5%. Real GDP remains the same, because it’s just a repeat of last year’s activity.

Most of the time, we care about real GDP – the number of pies. But which matters more to the country’s ability to repay debt?

It’s the nominal amount that matters. The pounds spent on pies, not how many pies. Because the debt is denominated in pounds, not pies.

Thus, a 20% burst of inflation over three years actually reduces the country’s debt burden.

That worked extremely well for Spain and Greece between 2021 and 2023, by the way. Unfortunately, it didn’t work in the UK. Our government spent too much and too much of our national debt is indexed to inflation.

But, without the inflationary burst of 2021-2023, our debt to-GDP-situation would currently look even worse.

If you’re interested in the maths, here’s an exceptional research paper from Oxford Economics which analyses how well inflation cut national debt loads during the 2022 inflation spike.

Unfortunately, this inflation was just the beginning of a long-term policy. According to IMF research, it usually takes governments imposing more than a decade of inflationary waves to cut the debt meaningfully.

With governments around the world now actively cracking down on immigration, they will have to turn to inflation to keep their debts under control.

I wonder if they realise yet that there’s a trade-off between sensible immigration policy and inflation?

Investors don’t seem to, with bonds trading at yields far below the inflation needed to cut our debt burden.

But the gold price seems to have figured out what’s about to happen…

The question is how you can profit from this trend. More on that soon.

Until next time,

Nick Hubble
Editor at Large