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Party like it's 1976? (Charles McQuillan/Getty Images)
It wasn’t supposed to happen like this. It was meant to be the announcement that trumpeted Liz Truss’s vision for Britain, cemented her position in Downing Street, and heralded a new era of boom-time growth. Instead, her Chancellor’s “mini-budget” took the currency to a multi-decade low against the US dollar, triggered calls for Truss’s defenestration, and inspired many to question whether she might be sleepwalking into a 1976-style currency crisis, when Denis Healey was forced to go cap in hand to the International Monetary Fund (IMF).
But however superficially attractive the parallels between now and the Seventies might seem, today’s global economic framework is vastly different. Most obviously, the UK no longer operates under the constraints of a quasi-gold standard system: prior to the Second World War, many nations operated monetary arrangements based on the gold standard, where paper money issued by a central bank was backed by gold and the currency’s value was expressed in terms of a specified unit of it. At the heart of the gold standard was currency convertibility, whereby a person could swap paper currency for the relevant amount of gold on demand.
This created domestic policy constraints, because when imbalances in trade between nations arose, gold had to be transferred between nations to fund these imbalances, and interest rates had to rise in countries where trade deficits existed. As a consequence, governments running significant deficits were forced to withdraw paper currency and raise interest rates to attract new capital inflows, which in turn led to rising unemployment and slower economic activity. In extreme cases, the IMF was brought in to support these economic adjustment processes, especially if the currency was in free-fall, as this was usually indicative of significant gold outflows and a resultant balance-of-payments crisis.
But the gold standard system is long gone and. accordingly, these kinds of external constraints no longer exist for the UK economy today. Along with the US, Canada, Australia and Japan, among others, the UK operates under a free-floating fiat currency regime. This means that its currency is neither backed by any metal nor pegged to another currency, so there is no reason why it should be externally constrained in its ability to “finance” its spending by printing more banknotes (unless, of course, there is a large foreign debt component, whose value or burden will increase in domestic currency terms in the event of a significant devaluation).
None of this is to say that there are no resource constraints on government spending. In fact, excessive spending is now more of a concern than financial constraints: if government spending pushes the economy beyond full capacity, inflation follows — and, as the UK is seeing today, this can affect exchange rates. (It’s it is worth noting, though, that the pound’s fall is part of a more generalised pattern of US dollar strength.)
Equally important for Truss is the fact that the UK government does not have a large amount of foreign currency debt. (In fact, even as far as domestic public debt goes, UK government finances are in pretty good shape relative to the much higher ratios we see elsewhere, including the US which, despite a higher debt/GDP ratio, is perversely experiencing significant dollar appreciation). This would have been the only reason why a fall in the external value of the pound would have forced the Bank of England to raise rates and support the currency, albeit at the expense of crushing economic activity via higher interest rates. Nonetheless, the Bank of England has started to make more hawkish noises in response to the falling currency, fearing that a weak pound will complicate the task of reducing inflation.
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SubscribeI enjoyed this article.
It wouldn’t have mattered what was in the Kwasi-budget. The entire media class, including the Rishiacs and those with a “Hardie on” at the Spectator, would have denounced it as an attack on the poor, a return to Victorian values, and “the end for Truss”. Sometimes it helps to be 52 and to have lived through many, many new Conservative leaders. The only change over time is that the hysteria has worsened, and the BBC has given up even its pathetic pretence at impartiality. I don’t imagine for a moment that Ms Truss and Kwasi didn’t anticipate this.
Your last line seems optimistic, looking at the desperately feeble responses Truss has been coming out with in her radio interviews over the last couple of days. If she and ol’ Kamikwazi had been expecting what the markets gave them, they’d have had a much better line of spin ready, surely? They’re just beginning to work it up now.
..a detailed plan to accompany the bomb shells might have got a better response from the markets maybe? Apparently they are about to put one together: that’ll be nice.
“Hardie on” – ha! Not come across that one before (as it were).
To be fair though, the Beeb wasn’t always like this. Its lack of impartiality kicked in duting the ’80s, or certainly became more blatant during the Thatcher era. Annoying though it is, i think we’re all used to it now and can ignore it.
What’s most unedifying is the reaction from within her own party. Truss has had an extreme baptism as PM, with the death of the Queen following on an unnecessarily long drawn out series of televised debates with Sunak, having to repeat the same things over and over again for weeks on end.
As soon as the chance arose to take action, she and her Chancellor did so, albeit without the usual cover of OBR forecasting. If she’d waited for that to become availzble, the msm would be screaming about her inaction in the face of “a crisis”.
She needs to come out fighting at next week’s conference; not in a Boris-blustery style but by showing resilience and determination to press ahead with what she was elected (by her party) to do. The markets will stop knee-jerking.
I agree with your sentiment although I don’t believe Truss has to do any media related thing ‘next week’. The media have gained their fake ‘authority’ over political appearances by monstering those politicians that don’t comply with media requests. This has distorted politics by magnifying short term reactions to an absurd degree.
Since the media already hate Truss there is no political advantage in her dancing to their tune. Indeed moving the media ‘scrutiny’ to a less immediate cycle would benefit us all. Other Conservative politicians should recognise this and stop hyperventilating.
I agree about the media and the distortion of the debate. But first, she needs to establish authority within her own ranks, which is why next week’s conference matters.
And lo and behold, the pound has already recovered it’s pre-budget position against the dollar.
..itight also help if Truss-Kwarteng had a plan rather than an article of faith wrapped in a wing and a prayer. Apparently the markets require a plan: most inconvenient of them!
The British stiff upper lip needs a general renaissance, pronto.
We definitely need to move back in that direction. It was much needed 1939-45 an (rightly maybe) eased a bit during 50s/ 60s but the pendulum has now swung way too far in the opposite direction.
I agree. And as a 74 year old, I can report that the mortgage rate was 14% when I bought my first flat.
…I’m nine years younger than you. Mine ran at almost twenty percent for a while! As to the bigger picture, having had all the bad news at once…and the pound now being about where it was before the hysteria started…the only way is up, and there are two years to get there…so I’m interested to see what next week brings…
…and bemused by the enthusiasm shown by the Labour Party for obeying orders issued by the IMF…are they now runnning for office as the Honourable Members for Davos, and the cartel of deracinated international bankers headed up by that distinctly suspect and wholly unelected Oligarchy?
That whirring you can hear in the background is Tony Benn rapidly rotating in his mausoleum..!
A 20% interest rate on a house that was under 3x your annual salary is still cheaper (and requires a much smaller deposit) than a 5% interest rate on a house that’s nearly 10x your annual salary though. Even at the absolute peak, you still had it easier than youngsters today
Indeed! I eonder where the additional x7 came from? Qui bono? Who has the x7 in the Cayman Is? The landowner? The developers? The Builders? The local govt? Someone must have it, right? Does anyone know? Looks like there are several monitory gurus here.. so, please tell us? Ou est le sept?
Immigration has put pressure on wages and housing, keeping one stagnant and pushing up the other. Add in money printing causing an asset bubble, and oligarchs funnelling dirty money into property and you’ve got your major causes
Yes indeed. Let’s get involved in a war! Oh, it seems we already are!
Indeed. the media vendetta simply transferred from Boris to Liz.
That’s not to say that they haven’t brought problems upon themselves (they clearly have).
But I’m in no doubt that there is a media vendetta *regardless of the facts and events*.
And that vendetta was always going to continue by the news media because they succeeded in getting rid of Johnson. Why stop?
Self-pitying nonsense. Their budget, a hard-Brexiter’s wet dream type of budget, is demonstrably crackers. To suggest that a sane budget would have elicited the same reaction is just another Brexiter with his head in the sand, looking for subterranean unicorns, maybe.
Truss is an ambitious chancer. Look at her in that debate with Sunak, she looks like she has been concussed, like a dying fish, lips twitching, eyes blank, mouthing vanities. Utterly clueless.
I don’t accept that Sunak lost out because he was Asian; it’s rather more likely that his obvious intelligence alienated party members. Nowadays, if you don’t have the advantage of being naturally stupid, you must (like Johnson) know how to pretend to be stupid. Otherwise, you will be vilified for being an “expert” or, worse still, appearing “elitist”. See my blog on “leaving the solar system”:
https://ayenaw.com/2022/09/29/leaving-the-solar-system/
Good hour-long podcast by 2 economists (bet you hate them already), debunking Trussonomics:
https://shows.acast.com/the-david-mcwilliams-podcast/episodes/inequality-stats-uk-budget-irish-budget-predictions
Your obsession with Brexit is unedifying, and your playground insults even more so. As for finding economists who agree with you, that is hardly difficult – you can find economists who will agree with just about anything.
Projection much?
When the debate is lost, slander becomes the tool of the loser. Socrates
What does this have to do with Brexit? Not every unpopular decision made my the Tories today has to be (tenuously) linked to a vote to leave a supranational bloc that was taken years ago
Maybe you’re right. Maybe Kwarteng could have announced policies specifically designed to aid the poorest and ensure that the rich paid a much higher share of tax and people would still have moaned that he was attacking the poor. And that would have been a biased attack on the Tories by the usual suspects.
But here’s the thing. We’ll never actually know because he didn’t do that. What he actually did was cut tax for rich people whilst doing absolutely nothing for poor people. Most economists agree that this isn’t a good way to achieve the stated purpose (that of growng the economy) and so, the result was a market reaction which will significantly increase the mortgage costs of everyone in the middle.
And the result is that, in this specific instance, all the carping about the mini budget being a stupid, self-defeating attack on the poor by a couple of incompetents without a shred of economic or political expertise between them is, in fact, fair comment. It might turn out to be wrong. But it isn’t biased.
That’s why this morning’s YouGov voting intention poll says that only 20% of people want to vote for the conservatives, including just 40% of those who voted for them last time.
..snd so it was with Alice: and the tea party was nice too: …meanwhile, back in realityland everything was topsy turvy..
”they do nothing to address the gaps in the supply chains that did so much to create the inflation in the first place.”
Ha!
”Inflation is Always and Everywhere a Monetary Phenomenon”
(Friedman)
Then
”2020 study by David Hope and Julian Limberg provided compelling empirical evidence that tax cuts for the rich (of the kind proposed in Kwarteng’s mini-budget) have historically provided no material difference in per-capita GDP or unemployment rates. Quite the opposite: the study found that tax cuts have consistently benefited the wealthy, and nobody else.”
OK Then – Why not just tax the rich at 100%? If there is no correlation between tax for the wealthy and per-capita GDP – just take all their money – easy, problem fixed.
MMT, Keynesian economics – if the Vu-Du economics work – why produce anything at all, just use the Central Bank to stimulate the economy, and have the Treasury Print money all you want….no need for all that going to work and making stuff – just make the money, easy.
What is puzzling me is all this talk of the Tory package pushing inequality. It might well do – but what has all the cheap money over the last decade done if not exactly that? Swelling asset prices up to a level where they no longer bear any relation to their true value, placing housing out of reach for more and more of the population (hellooooo socio-political tension, inter-generational resentment etc.) and leaving only a small property-owning class with all the assets (which make their owners richer and richer). While this development has always been accompanied by a healthy amount of scepticism about its sustainability, there hasn’t been any outright panic about it – even though it will be painful when the party ends.
Britain just seems to be ahead of the curve when it comes to getting out of the cheap money cul-de-sac we’ve reversed ourselves into. Instead of sneering and laughing, people (especially those in the Eurozone) should be looking at this and thinking how to plan for the same procedure. Things will be done differently here (more incrementally and with plenty of annoucements by the ECB of “we’ll raise interest rates….soon…at some point…probably by July….”, but the pain will be felt eventually. And Italy….that’ll be fun.
If reducing the tax take would improve growth, surely taking it off VAT rather than the top rate of income tax would be a better solution? It would reduce prices, and as it’s a tax that disproportionately hits the poor nobody could be accused of being for looking after those who need it the least
Quite. Or raising personal tax allowances and the lower threshold for NI, which would benefit everyone (in employment or on a pension) but disproportionately, those at the bottom of the income scale. Giving more money to the already wealthy seems to make no sense at all, politically, economically or socially.
Lowering Corporation tax, encouraging R&D and increasing investment allowances would seem to be going in the right direction, if we want to encourage growth.
Any of those at least give the impression of trying to stimulate growth. Even those that disagree with that approach can at least see the logic of reducing costs for businesses can hopefully allow them to expand and create more jobs/growth.
Borrowing billions of pounds to reduce the income tax of the nations wealthiest however simply looks selfish and looking after vested interests, and has left Labour with an open goal that they’ve gladly taken and could realistically see the Tories out of government come the next election
As I said elsewhere Blair had the higher tax rate at 40%. Cameron increased it to 45% with a little help from Brown. As someone who is and have always been on 20% rates or thereof I don’t have the prejudices of envy the high flying intellectual elites of the Labour Party have.
My only gripe with the Conservatives is that if if they want to grow the economy then for God’s sake stop selling off our Companies to Private equity sharks worldwide who see this Country as a soft touch.
There’s always a calibration. Of course you don’t want to tax anybody at 100%. The point is finding a level which optimises economic growth and actually provides more bang for the fiscal buck. Far more efficient to direct tax cuts toward income groups with higher propensities to consume.
The broader comments are cliched nonsense, so there’s no point in addressing them seriously
..”out of the mouths of babes and sucklings” – you got it! Tax the rich but not at 100% silly! And not on their income either! Tax the wealth itself. As you suggest it does nothing (apart from boosting the sale of Ferarris, Masseratis and French yachts)..
A 10% tax on GB wealth will bring in €1.8 trillion!
The obscenely wealthy are still left with 90%.. they will still be as rich a cresus!
The obscenely rich don’t pay tax, silly. I’m not sure the point is to give more money to the ‘poor’ either. The theory is more along the lines of identifying the people who will spend the money they’re not taxed on – presumably on something that stimulates UK growth not just on a foreign holiday or luxury import. I’m curious though, have the various groups identified in the past as being the perfect vehicle for this tax relief based economic stimulus actually EVER effectively achieved what was asked of them? At least there’s a large luxury yacht manufacturing business in the UK.
When George Osborne whines about tax cuts you know you’re in bizarro world.
Indeed with the press now lauding Austerity Osborne we just know that “remainers” are behind all this fuss. Things will soon settle down and we will all move on to the next bid debacle which I suspect will be the EU commandeering all EU gas reserves to give them to Germany.
Kwasi said more measures will follow. These will have to be fiscal, but mainly support)ly side reforms. What this incident tells me is that the hostility to Brexit is radical, and runs unabated. It is a form of madness.
Not sure if your final sentence meant: “Brexit is a form of madness” or hostility to it is? The former is true of course. Brexit was quite a mad thing to do.. check Michael Lambert on that one for chapter and verse on the cost/difficulties/ and loss of easy access to the EU’s 600 million strong marketplace!
Auerback claims “...there is a substantial body of economic work illustrating that ‘trickle-down economics’ is fiscally inefficient in terms of delivering economic growth…” and then, with some hyperbole, invokes Hope and Limberg’s LSE ‘working paper no. 55’ as the definitive argument on the subject. It’s not clear that he has actually read their paper, or just the headlines about it from the progressives in the mainstream media. Certainly, he offers no interrogation of Hope and Limberg, and, like them, he offers no analysis of any argument from the other side. Here’s one contrary, and more sober, view of their paper as compared to another opposing paper: “So a new study that has not yet been published or peer reviewed gets paraded around by the media as definitive evidence that ‘trickle down economics’ has no positive effects. A published piece in a top 5 economics journal that finds positive effects of tax cuts gets essentially no media coverage. I’m not always sold on stories of media bias, but in this case it seems pretty clear.” As Thomas Sowell states, only politicians and journalists talk about the “trickle-down” effect: no serious economist has ever done so. But Sowell also goes on in the same article to demonstrate the opposite view about the effect of tax cuts.
It is not the 1970’s. It is much worse! In the 1970’s we still had a significant domestic manufacturing base. Since then, the economy has become totally dominated by financialisation. That is one reason why London has had such a disproportionate influence.
However, we are now in an environment where tangibles really count. That is why the financial sanctions on Russia have backfired so badly – a terrible own-goal. Russia is self-sufficient in all the basics of life. The UK and the rest of Western Europe are not.
Now that the financial illusion is broken, we need to look at how to get real again.
Also unlike the 1970s, we now have a managerial class (that includes the “mainstream” media) which has been indoctrinated into the mediocrity of uniformity and groupthink (I won’t dignify their training by the term “education”). They are expert at manipulation and spin, but nothing real. Anyone with heterodox perspectives gets expunged from the power ladder.
Ideally the mediocrities will let themselves be pensioned off (by far the cheapest solution) so that people with a grasp of reality can work at untangling the mess.
History suggests, however, that the mediocrities of a declining empire cling desperately to power by all means at their disposal (mostly very foul and repressive), and only get dislodged by brute force. The ensuing chaos often leads to something even worse (cf. the French Revolution).
So please, you mediocrities of the ruling class, take early retirement!
Also this
”governments were forced to run deficits to withdraw paper currency,”
I think this needs a bit of changing up – maybe to
governments with deficits were forced to withdraw paper currency,
but r.e. the Pound – it has been going down against the $ since WWII. UK just does not make enough for its social spending – and since it lost ‘Reserve Currency Status about 90 years ago, it can’t afford this.
Because Biden closed SWIFT as a sanction against Russia in his insane war meddling – USA will lose it as well, sooner from this debacle as the BRICS with Iran, the Gulf, and all the resource producers around the globe are planning a commodity backed Reserve Currency… and if they pull it off it will be very bad for the West…. (maybe it should be BRICKS, if you put in KSA, why not – they will be there for the commodity Reserve game)
Yes, that definitely needs to be cleaned up. I’ve alerted the editor and will fix. Good spot.
Good balanced article. Won’t play well with the extremes on both sides, but good sense rarely does
Liam Halligan said the other day that some Tory MPs have submitted “letters” to 1he 1922 Committee. I can’t decide whether or not he was joking.
Yes, the first signature on it is probably a gentleman by the name of Boris Johnson. 🙂
You sure it wasn’t Carrie Johnson?
I bet George Soros has had a hand in this.
What is the issue with the reduction of tax for the high earners? It stood at 40% for 13 years before socialist Brown increased it 1month before he was kicked out of office. The Tories kept it at that probably under threat from the Lib Dems. But now for some reason Labour are apoplectic with rage at the reduction and the inequalities it supposedly brings. Forget all the hype about Starmer modernising the Labour Party, its heart yearns the return of Corbyn and its nasty party label.
You forgot about the cut in the basic rate to 19%. “Trickle Down” is just another attack line from progressive types which doesn’t mean anything; it just makes tax cutting appear like a mortal sin.
You cannot money-print your way out of an inflation crisis. That is like trying to put out a fire with petrol!
Well, technically, if you used enough petrol, rapidly enough, you could smother a fire, but petrol-smothering does not seem like the best approach to fire-fighting.