Jon Moulton warns the government to reduce public debt before it's too late
Private equity boss Jon Moulton has called for a dramatic cut in public spending, warning business leaders they must hedge against currency collapse as a result of the government's mismanagement of the economy. Speaking at a COA Solutions backed event at the London Chamber of Commerce and Industry, he lambasted the chancellor for responding to the financial crisis by adding more debt. This situation "was caused by debt", he argued, "of course the government's answer is lots more debt. Which is entirely analogous to giving heroin to a heroin addict. It makes them happy for a short period and guarantees that it will be worse in the future."
Moulton credited the chancellor with an error-strewn period in office, adding: "Darling has got just about anything wrong you can imagine. He continues to bring out forecasts that nobody believes." The chancellor has defended his Budget forecasts and refuses to change them, even though neither the Bank of England nor the IMF agree with his calculations. "I delivered my budget statement four weeks ago," he said yesterday. "None of the figures I have seen since would change the projections that I have made."
The chancellor has predicted growth of 1.25 per cent next year, but Moulton's most optimistic forecast for 2010 is growth by "a fragment". And it will be slow, he said. "There is an enormous amount of surplus capacity being built up in the economy at the moment. And the economy has to grow quite a long way to take that up again. So people will continue to lose jobs over a long period."
Moulton also questioned the value of the UK as a brand once government debt reaches 100 per cent of GDP, which he predicts will happen by 2014. "Most countries that reach 100 per cent of GDP end up in default or with the IMF," he said. What would you do with a company that "always missed its forecasts," he asked, "had unhappy owners; that has a huge unfunded pension deficit, that has managed the remarkable feat of increasing overheads in real terms for 11 straight years, and can only pretend to make ends meet by charging customers more and borrowing to pay the interest?" If it were a company, said Moulton, "it would have been dead and buried a long, long time ago. Eventually the foreigners will stop funding us."
Moulton queried the morality of such heavy borrowing. "Mr Madoff ran a very similar scheme to the UK's finances. Early investors got paid out, the ones who came late paid for it. That's exactly how we are running the UK economy. We're diminishing the pain today and leaving the pain to be picked up by other people: not great ethics." He suggested that the government should "take the medicine" soon, which is to "cut public expenditure quite sharply. That needs to happen above everything else." The next government, he added, "would be mad not to do it right at the start of their term, otherwise the economy will be in a shocking state by the time they are finished."
As managing partner at private equity firm Alchemy, Moulton has invested £1.9bn in struggling companies. "Things are more unstable than they have been at any time in my working career," he said. His advice was to prepare for the unexpected, particularly with regard to interest rates ("when they move they will not move in small increments") and sterling ("pretty feeble"). Currency collapse is a real threat, insists Moulton. It must be planned for. Business owners should sketch "extreme scenarios that are not plus or minus five per cent. You need big variables. If you can pay the interest today on your borrowings, that's good. Can you pay the interest rates if it goes up by 5 per cent? Fixing rates is a very attractive thing to do at the moment."
Finance will continue to be hard to find, so be creative, suggests Moulton. Make sure your salaries and commission are paid on cash orders, "not on the threat of an order from an insolvent customer." If your credit insurance is paid and you are solvent, you can take advantage of the "fear in your customer and suppliers to extract discounts". Managing creditors, he added, is one of things you have to do if you are short of money. "Confusing them is one of my favourite tactics: if you pay them on time every third month, you tend to get shuffled off the risk list. You get more out of running an erratic pattern than out of paying them all late."
Moulton also warned business owners to keep an eye on staff, who will behave unpredictably under pressure. "Fear has overtaken greed," he said. "Many of your staff will be under serious pressure, as their credit card company pushes in on them, or as they move into negative equity." Watch out for fraud, he advised, "which will happen a lot more with people who are desperate," or who become motivated to steal if they think they are going to be made redundant. "Fraud will occur on a scale like you've not seen before."
Posted 21 May 2009 : Director.co.uk
