The problem is that all this completely defies the economic orthodoxy, which is probably why mainstream economists are attacking the Government’s plan so vehemently. As Adam Tooze writes: “What the critics of the UK are performing is the role of gatekeepers, a function, which is at the heart of elite economic policy discourse.” This wouldn’t be so much of a problem if it weren’t for the fact that the flawed orthodox view is also shared by people who, unlike economists, have a direct impact on the economy — financial traders. And this can lead them to make some very bad decisions.
The recent gilt sell-off is a perfect case in point. While some traders might have actually been motivated to unload their gilt holdings through fears of an imminent default, much of the sell-off was actually an attempt to profit from the panic through a practice known as short selling — which consists in selling a financial asset in the expectation that its price will fall, thus generating a profit to the seller.
This is ultimately what economics textbooks say should have happened: a higher deficit will automatically lead to higher yields (and therefore lower prices), and scaring the government through a sell-off will convince policymakers to raise interest rates even more. Unfortunately for the traders, this is not how things work in the real world. In the latter, betting against central banks is always a losing game. They know that very well in Japan, where it’s known as the “widow maker” trade.
Which is why traders were completely caught off-guard when, on September 28, the Bank of England announced that it would be buying up a potentially limitless number of government bonds in order to ease market tensions. This immediately caused yields to fall and stabilise at the level they were at before all the mini-budget hoo-ha — thus thwarting the speculators’ plans.
It’s been said that the BoE’s intervention “saved” the Government from the consequences of its reckless decisions. This is also nonsense. The BoE was simply fulfilling its mandate — acting as a lender of last resort. Moreover, in a democracy, it’s perfectly normal for the central bank to accommodate the budgetary decisions of government. The alternative is the situation in the Eurozone — where democratically elected governments are expected to do what unelected technocrats and central bankers tell them to.
There has been much talk of the fact that the BoE was forced to intervene to save pension funds that would otherwise have faced “mass defaults”. This all sounds rather scary, and has been weaponised to attack the mini-budget — by implying that the Government’s actions risked sending the savings of millions up in smoke. In fact, the pension funds’ quasi-meltdown is entirely a consequence of the way pension systems, like everything else, have become hyper-financialised.
Simply put, today pension funds use safe assets such as gilts to raise large amounts of cash through complex financial instruments, which they then use to pursue high-risk investment strategies. The problem is that if the value of the gilts falls too sharply, the pension funds risk going bust — which is what happened last week following the gilt panic. The problem’s not the mini-budget — the problem’s the way in which we’ve allowed pension funds to gamble with people’s savings.
A similarly doom-laden tone accompanied warnings about a “currency crisis” in which the pound will supposedly keep sliding further and further down until it becomes so worthless that the UK will be forced to go cap-in-hand to the IMF. But this was never likely to happen. Countries that float their exchange rate, such as the UK, cannot experience a currency crisis in the traditional understanding of the term — unless they have large external liabilities in a foreign currency. As Paul Krugman observed, that was the story for Asia in the Nineties, the Argentine crisis 2001, and is part of the problem in Turkey now. But this doesn’t apply to the UK, whose external liabilities are overwhelmingly sterling-denominated. And this is why, following the Bank of England’s intervention, the value of the pound has already bounced back to the level it was before the panic.
Why did the pound fall in the first place? This was due to much the same reasons as the gilt sell-off: unfounded fears over the deficit, attempts to pressure the government into backtracking, and, first and foremost, speculators in the City and elsewhere hoping to profit by shorting the pound. As one trader said: “We were absolutely sure the pound was going to crash. Of course we are going to short the pound. This is what we do.”
The problem is that, unlike bond markets, the government’s options are more limited when it comes to quelling future currency speculation. One option would be for the Bank of England to prop up the pound by buying it on foreign-exchange markets, but that requires large amounts of foreign reserves, which the UK doesn’t have.
Another option would be to raise interest rates. After all, part of sterling’s weakness is simply the result of rising interest differentials vis-à-vis the US, which is hiking up interest rates in an irresponsible manner that is causing problems for the rest of the world, as central banks are forced to raise interest rates to stem the outflow of capital. However, raising interest rates won’t reduce inflation that is entirely driven by supply-side factors — namely the energy crisis and supply-chain bottlenecks — but will almost certainly cause huge pain to the economy, especially to the housing market, which is already in trouble. (Even the UN is now calling on central banks to halt interest rate increases.)
So, it’s a good thing that the Bank of England is still refusing to hike interest rates. After all, the pound has been sliding against the dollar for more than a year, indicating that this part of a longer-term adjustment which could actually help Britain move towards a less import-dependent and more self-reliant economy.
In the end, the best option for the UK’s authorities might to be accept there’s little they can do, in the short term, to rein in inflation that is largely supply side-driven, stop attempting to prevent the pound from falling in the name of some misconceived “strong pound” policy (which is what led to the government’s flawed response to the 1976 crisis) — and focus instead on protecting people and businesses through increased government spending.
This may or may not be inflationary. But the alternative — giving in to market pressure to raise interest rates and rein in the deficit — is almost certainly bound to be worse.
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SubscribeSome decent analysis and perspective after the hysteria last week. Unfortunately Kwarteng’s u-turn may have let the disloyal Tory dogs out, sniffing success, and dooming this government.
I agree with you about some decent analysis. I struggle at times to pull things together about economies. It does seem to me that MMT is taking the power away from merchants and putting it back in the hands of the government, that it’s the merchants who play with the economy for their own benefit. But, naturally, there’s a downside to this. But it does appear to me we’re entering a new way of managing economies. I’ll be interested to see if others agree with me.
100% with you. This article is excellent in analysing the many different components of the recent crisis. Yet like you I worried about its breezy conclusion. If the Bank does not raise interest rates how on earth will we ever tame the inflationary beast?? We all knew that Boris & Rishi and Bank adopted de facto Magic Money Tree economics to deal with the Covid shock. Is it really that easy to just print it??? Weimar anyone? An unsaid truth is that their MMT- after decades of Blairite Statist Orthodoxy -has already had a deep and malign impact on the outlook of ordinary folk. Millions now feel and express a hooman right and entitlement to prosperity a d protection from any hardship. Justvwait for the Mortgage Relief campaign from the over extended greedy middle class. This is why – encouraged by the BBC ‘s latest panic inducing hysteria – so many dismiss the Truss case for tax cuts and growth from a private sector. Who needs that?? Rishi’s ‘whatever it takes’ has corrupted us deeply and deepened the grip of a dysfunctional self enriching and corrupt State sector (one in thrall to an Equality Cult) over all our lives. We are more Honnecker’s GDR 1984 than Thatcher’s UK 1984 now. Our freedoms have shrunk. We are already in that cage.
The economy grew, house prices went up and gov debt remained stable. He also pushed through “light touch regulations” – supported by everyone in British policy circles.
He increased public spending but that is what British people wanted.
Yes, British border guards were gunning down citizens this summer in Folkestone. That is why you had the long lines.
“He also pushed through ‘light touch regulations’ – supported by everyone in British policy circles.”
You might find a few dissenters among tower block residents (& bereaving relatives of former residents) dealing – still – with the consequences of ‘light-touch’ building regs…
I was talking about finance (City).
The local managing agent for Grenfell Tower was obliged to insulate the tower block to meet the EU’s energy commitments (Directive 2010/31/EU ) which permitted an inflammable thermal insulation material. This meant that fire-regulation standards proposed by national bodies, such as our own BS4814, were not mandatory. A rare example of “light touch regulation” by the EU?
Lets not forget that most deaths in Grenfell disaster are due to moronic decision of Fire Brigade to not evacuate Tower block early enough.
I was there at about 5am or so and you could see that fire engines could not control fire, which was spreading up the cladding beyond reach of water hoses.
Utter tosh. Blair created an unsustainable BUBBLE in the housing market. 30m portfolio for him and riches for London and SE. How convenient. Debt stability?? Maybe the hyper inflationary QE of 900 billion passed you by. Light touch regulations?? In City for sure – maybe you also forgot a Crash and massive State bailout in 2008. But otherwise businesses have been suffocated by the torrent of regulation from the EU which – fused with their ‘enlightened’ policies on climate and Net Zero – have resulted in years of stagnation. The rigged property market was preserved with ultra low interest rates to maintain the illusion of wealth and stability. But we have stopped generating wealth and now practice MMT which will sink us. Blair and every PM will share in the blame now that this mucky nasty bubbly Potemkin Village is exposed and destroyed. But you say – hey, give people what they want!!!!! The point about Honnecker and GDR was that the State controlled everything – there was no free speech and no free enterprise. But if you want to talk about borders, something the people emphatically do NOT want, I presume you are happy that a population the size now of Abingdon have worked in league with vicious people and sex trafficking gangs to secure a place at the front of the queue ahead of legal asylum seekers. And go check on the wars in Albania while you are at it.
Honnecker, Albania, The Pipls Republic Toylitte of Nu Britn under Boris? All the same…
The days of the man in the red coat and silk hat ” raising the bank rate” are gone! As I tire of saying on this medium, bank rates now are governed by the bond markets, and manifestly NOT the other way round…… as ToiletTrusettee has just discovered!
I an not an economist, but I always wondered why people think that printing money has no consequences?
Interest rates were 5 or 6% before 2008 financial crisis.
Why do people expect them to be close to zero for ever?
I am a pensioner with 5% maximum inflation protection on my private pension.
We are hearing voices from even Conservative circles that benefits should be uprated at inflation rate.
I am sorry but why should people like me pay taxes to provide these sort of benefits to people who can not be bothered to work in economy with many job vacancies?
The party seems utterly intent on destroying itself -prepare for Stammer & Co -at least it can only get worse. Tory back benchers seem to be divorced from reality.
Interesting analysis indicating market over reaction and self interest.
The 1921 committee seem to have lost their marbles having destroyed two and going on a third PMs-a nouveau politique?
It is horrible to watch. But it is inescapable truth: the Tories seem addicted to rebellion, factionism panic and regicide than a commitment and mission to save free enterprise from the Statist Orthodoxy. They and the entire political class have utterly betrayed us. They are abandoning us to the the hateful progressive Leftist Remainiacs bent on torching Brex. If they bow again to the MSM Hysteria and give benefits a settlement above both private but public sector, it is really is game over. The stakes are so high. But crass fools like Moursaunt just want to look kind. Aaah. They forget that defeat to the Knee Bender 2 Ref Starmer means precious things like free speech and autonomy from an overbearing State – never mind prosperity – will never ever come back. The stakes are that big. Declinism + the incoming Greatest Depression mean it will be lights out. But still this Tory rabble resist the demands of governance. Shame on the pygmies.
How long have you maintained that the MSM works against the Conservative party? If the answer is ‘only since this recent crashing of the economy and not at any other time in the last 12 years,’ could this problem (as it must be to you) perhaps lie with the Conservative party rather than the MSM who have been consistenly on their side while shelling out low attacks on Labour, with a lower regard for the truth?
I, like you (I suspect), feel an increasing loss of control. Though I cannot see how further privatisation and ‘freeing’ of the market can give that control back. A sense of control over your life (tell me if I sound controversial) comes from secure, well-paid and skilled work, decent affordable housing and services and some connection with democratic processes. Where are the Conservatives making that promise? Since they’ve been in power services have been privatised, British manufacturing has been hollowed out, the planning system has been endlessly streamlined to little effect etc How exactly can you place hope in a redoubling of efforts in that direction, as is being done by this government? If you care about enterprise, more people would have a far better chance of becoming entrepreneurs if, for starters, everyone was paid more and didn’t waste so much of their salary on rent and mortgages (even the IEA admit that the housing crisis is the single largest cause of poverty).
As to the threat to free speech, how is Starmer a threat to that? Sure, there is a certain intolerance in the air and perhaps people are more careful about watching what they say, but this is a cultural shift and any intervention from the government in these affairs (as I understand they have been proposing with these free speech Tsars in universities) is a more serious threat to freedom of speech. People policing speech is one thing (annoying), the government doing so is another (tyrannical).
It sounds like your concerns are patriotic, like mine. Essentially you don’t want our country to become crap, slipping into irrelevance while squandering its talent and exploiting many for the benefit of few. You’ve identified the state as chief enemy, and see a freer market as the way out. I instead see the state as a tool that can either be on our side or not (unlike the market which without proper controls will to my understanding always end up on the side of the powerful, serving the weak over the strong, demand over need, wealth over work etc).
To quote the above author in another piece he wrote for unherd:
‘The point is whose interests the state should serve. “Less state” won’t make us freer, let alone deliver some mythical “free market” — it will just make the majority of us even more powerless in the face of financial and corporate power, the concentration of which has led to the lockdown catastrophes. What we need is a state that does the exact opposite of its modern incarnation: one that represses Big Capital, while expanding the liberties and rights of individual citizens and workers.’
I hope we can find some common ground. I so want this country to come together rather than ripping itself apart over a culture war largely fuelled for the benefit of the fake patriot elites reigning over us in the interests of international capital.
Perhaps someone can set a layman straight here but I find the idea that you solve your economic problems by printing more money to smell bad. Isn’t increasing actual productivity a better option, so there is substance behind the currency value? To take steps to grow
By acquiring more of the
Money already in circulation? For years now we’ve been printing money just to pay the emergency bills. I can’t remember the last time I heard solid plans for growth.
Also, as an aside: whenever one sees the words ‘gatekeeper’ and ‘discourse’ used in a critical fashion it’s reasonable to suspect there’s a modern Marxist thinker behind it. Haven’t we learned that lesson?
It is called MMT theory. People (the author) have confused the last 12/13 years of QE and low rates (actually negative in real terms) as the new default economic position. You can print money and it doesn’t matter.
Countries that suffered the same supply-side restrictions as the UK but didn’t increase their money supply have been spared the return of inflation. But the Bank of England is hysterically denying the link between the money supply and the price level.
Which countries????
Gosh, let’s just print everyone £1000000 then.
Well, of course it’s not that straight forward. It doesn’t mean handing out large amounts of money to everyone. And in fact if it worked then why not give everyone £1000000? But that’s not what it’s about. Maybe read up on it a bit.
I doesn’t just smell bad, it is bad. It is what the US has done, and we are seeing the effects of it in rampant inflation, with the trickle down effect of other nations feeling the cost of goods go up while we have less money to spend.
No, when you have a fiat currency, which is what the US has, you have to back up the money printed with a sustainable economy; goods and services worth that amount being printed. That is the balance economists and central banks work to achieve, versus currency backed by gold or silver is redeemable for the amount in those precious metals by the gov’t. Just rampantly printing cash to pay for things throws that balance out of whack.
This is called Modern Monetary Theory, and it has been proven decisively wrong.
I don’t think MMT suggests you print cash to pay for things. quite the opposite.
Stephanie Kelton’s Deficit Myth is very good on this and clearly states that issuing currency is good or bad depending on what you do with it. Furlough was a bad thing as it wasn’t spent against resources that would be productive in the economy.
Inflation is often defined as “too much money chasing too few goods”. Admittedly that is somewhat over-simplified but it is a good rule of thumb.
If you double the money supply while keeping constant the supply of goods (and services), then it is not difficult to see that prices will double.
The position has been somewhat distorted over the past two decades because most of the excess money has been diverted into the assets markets. (In this context the housing market is an asset market.)
Net result: although the price of housing has skyrocketed, the price of food has remained remarkably constant, and that has lulled voters into complacency.
Now the bubble is bursting.
A little more complex nowadays- on line goods and services cause price completion and consumer choice, which drives prices down…just look at airline tickets? … where the consumer has no choice or alternative, anything from utilities to station car parks, the supplier can set its own captive pricing.
Modern day inflation is light years away from the Heath days.
Money is ” printed” in a variety of different ways… credit is effectively a version of printed money… banks can lend ” n” times the deposits they hold…. when you get an interest charge for going over your overdraft limit, that is ” printing money” .. bank and credit card charges…
The increased deficit spending is going on productivity improvements.
You think austerity is good for productivity growth?
??
For years it was the left who said that you could print money and spend without limit. Now apparently it is the right. I did not believe them then, and I do not believe you now.
Exactly
“Kwasi Kwarteng’s squandered chanceHis U-turn on tax cuts was fuelled by hysteria”
I thought that the u-turn was caused by threat from his own MPs that they wouldn’t support tax cuts. I have always thought that, in a parliamentry system of government, allowing party members to choose the leader of a party is a nonsense, as that leader is still dependent on the support of MPs to maintain their majority. I guess I thought right.
Yes, it seems to me a prerogative they have no right to. The public voted in a party and a leader they saw as leading the party. Either shut up or go to the polls. In Australia there’s been a high turnover of leaders because the party members got nervous watching polls which turn out to be regularly wrong (7 Prime Ministers in 15 years). So the government and the people are held in the grip of a lot of bedwetters.
Yes. Remember how all the polls said we’d be staying in the EU?
The public did not vote in Liz Truss. Tory members did. Maybe the Tories should have gone to the polls when Boris fell, if they wanted the head of their party to have that kind of authority?
Exactly.
But if Tory MPs had chosen their own leader, then that leader would have had the requisite degree of authority. Constitutional practice has always been that a general election will only be called if the monarch is satisfied that nobody, from any party, can gain support of a majority of MPs and hence form a government.
In the UK system parliament is *supposed* to have the power, and the PM is *supposed* to stick to measures they will support. If you want a presidential system system (or an autocracy), change the constitution and make one. Or move to Venezuela.
I don’t think it’s a Presidential system having a leader that leads. The alternative is decisions by committee. But that might appeal to people too afraid to stand by their principles.
The parliamentary system did not prevent WInston Churchill, or Clement Attlee or Margaret Thatcher or Tony Blair from leading. Maybe if you need to neutralise possible opposition before you can lead, you are not much of a leader in the first place.
My point was that having a strong leader who leads has nothing to do with an autocracy or Venezuela. Obviously Churchill worked within a parliamentary system, but he still led and did not cower to party members. Unless you want to dispute that he was a leader.
The four people I mentioned led not only the nation but their own MPs as well. Come on, if you cannot carry either your party MPs or the voters with you, what kind of leader are you? If Liz Truss is not leading even her own party, the fault lies entirely with Liz Truss.
Mmm, not quite what you were suggesting earlier.
And to add to the ironies on ‘leading’ – Churchill only got the gig because of Labour support. Early on he never inspired a majority of his own party who set him up for a fall.
The stupidity is Truss seemed to have no moment of reflection that her leadership position right from the start was fragile given the paucity of her mandate. The thought she needed to sound a broad spectrum of colleagues out, test her ideas, find a consensus, as a natural consequence of her precarious mandate just shows a dreadful lack of leadership and political judgment.
” gig”? …
Whilst true, the almost immediate death of the Queen hugely sidelined any plans she might’ve had for taking the temperature within her party regarding the mini-budget. She had a role to play as PM which demanded constant appearances, scrutinised by the world’s media.
Her biggest mistake was relying on her Chancellor to put forward the proposals without coverage of an OBR forecast. That was poor judgment, but then again it seemed like the whole apparatus of state came to a halt during the period of mourning.
But, Rasmus, you have either misread my post. or you don’t really understand how a British style parliamentary system works.
It’s all in Walter Bagehot. Changes that came after he wrote his “The British Constitution”, are basically tweaks and footnotes.
Yep, I misread your post. I thought you said that allowing MPs to select the leader was nonsense. Which is the opposite of what you actualy said.
Maybe I am too used to always disagreeing with people here 😉
Sincere apologies.
That’s okay. No need to apologise.
“Allowing party members to choose the leader” is indeed a nonsense. But only because we have this crazy system whereby the leader of the majority in the Commons automatically becomes the nation’s CEO.
If you suggest a directly elected Prime Minister you are immediately accused of being a republican trying to get rid of the monarchy.
I’m my case at least that is the opposite of the truth.
We have the King as Head of State and the Prime Minister as Head of Government – why should the method of choosing the PM make any difference?
The constitution is based on cabinet government, composed of ministers, of which the Prime Minister is simply “primus inter pares”.
It’s perfectly obvious (even when, or perhaps especially when the cabinet is largely ignored, as seems to have happened with the mini-budget) why a Head of Government can’t be elected – they’d still need the support of their MPs to get legislation through the Commons, and if they (or their party) hadn’t chosen the PM the chances of that would be greatly diminished. Where would the authority of a PM lie if the Commons wouldn’t support them, as we saw with Theresa May over Brexit?
Well put. Better than my efforts!
You say the Head of Government can’t be elected because they’d need the support of MPs to pass their legislation.
Perhaps you could explain how America manages to survive with an elected Head of Government – the President?
The only fault with America ‘s constitution is that the same individual is both Head of Government and Head of State.
But Bill, The PM is not a CEO. As Bagehot famously described a PM – primus inter pares: First amongst equals.
You’re right about first among equals. But that is exactly the problem: when did you last encounter a ship with 2 captains – let alone 20+ captains, which would be necessary to make the analogy complete.
Or an aircraft with more than one pilot-in-command? Or a fighting force with multiple COs? Or a private company with multiple Managing Directors?rd
Remember the old definition of a camel:
“A horse designed by a committee” .
What, no mention of furlough and the disappearing billions of pounds and millions of workers?
A disaster completely caused by MMT , as any neutral can see.
Let’s rebrand perpetual motion machines as Modern Mechanical Theory and start issuing patents!
Printing money and giving it away willy nilly is not MMT. Far from it.
A bizarre article. It is both spot on and complete nonsense at the same time. Yes there was never any serious chance of a default, floating fx regimes don’t have crises and the pension system brought this on itself a la 2008 but it is patently wrong that UK inflation is a supply-side problem (it’s 20%y/y M4 growth in early 2021) or that there is a place for unlimited money-printing to finance fiscal policy (modern monetary theory).
at last! informed comment!
The upshot is that these economic film flams are being deliberately engineered to justify the incoming digital currency world governments will impose. Get ready for Barter Town.
Whilst the central bank can manipulate the gilt market (as it has for a decade), it cannot do so without consequences unless the country itself does not require external financing. It has managed to do so to date only because the interest rate relative to other govt bonds was consistent – ie everyone was manipulating their bond markets consistently. Countries which have financed their fiscal deficits internally have managed very high debt loads (eg Italy or Japan). The UK has the worse balance of payment deficit in the G20, so most certainly does require external financing. Traditionally this has been achieved roughly 1/3 financial services surplus; 1/3 inward investment (including all the bent money); 1/3 borrowing. As an aside, this is why we will never address money laundering in London – we literally need the money. The banks cannot influence the currency markets other than at the margin, or being highly co-ordinated (eg Plaza agreement). The fact the chancellor crashed sterling was because the fragile degree of trust keeping this ball in the air was completely compromised by his attitude – he seems not to even care to pretend about fiscal rectitude. The bounce wasn’t because of the reversal of the 45%, it was because it demonstrated that his freedom to act as he wants is very constrained, and so he might have to be a bit more sensible. Yes, the government cannot go insolvent, but the money that you are paid back can be worth a lot less that it should have been (inflation, currency depreciation), which is much the same thing to the lender.
Laslty, you seem not to care about sterling’s relative decline. Firstly, our inflation problem is imported so currency decline does very much matter as it fuels it directly. Secondly, it has been an absolute age since sterling decline significantly benefited our exports, so using it as a means of maintaining relative competitiveness does not work anymore. The only thing which will pull us out of this nose dive, which has been decades in the making, is now a degree of autarky to re-introduce industries which we have lost. This might have been a real Brexit bonus if the morons in the Tory party realised that Ricardian comparative advantage and free trade works for both parties if you have something to sell back, something significantly more material than cheese in Japan.
” Money Laundering”?…. such a joke socialist phrase that in reality means nothing!
What an absurd article.
1) Why bother working if printing money and importing stuff works?
2) Japan does what it does (a well known fact) because the country has huge overseas assets, and it exports. UK’s current account deficit is about 4%.
3) Market can stay irrational for a very very long time, eventually they wake up and bankrupt countries.
4) Since the GFC real interest rates have been negative. UK GOV debt has gone through the roof (as % of GDP: c.40% in 2007/8 – c.105% in 2022). If debt in UK was 120% the economy would be more productive? More innovative?
“Why bother working if printing money and importing stuff works?”
Thats your argument against it? Why would people stop working?
Fine, why should UK GOV not cut taxes since it can borrow and spend without limits because BofE will just buy the bonds? And everything is priced in £ anyway. That is exactly what has happened since 2007/8!
Is the economy more productive?
I’m only discussing MMT, not selling it. My query was why you think people would stop working?
Smith thinks people will quit working if they get money for free.
But a minimum wage, right?
“1) Why bother working if printing money and importing stuff works”
MMT includes support for a Job Guarantee (JG). Instead of running a system which pays people not to work as is currently the case, you turn that system into one which pays people to work, acting as an employer of last resort. People doing a JG job receive a living wage. With low unemployment resulting from such a scheme wages are likely to have to increase to match this in the private sector. Employers there might see this as a downside to the idea. However, businesses would benefit from the fact that their local customer base will always be at near-full employment, the best kind of customer base. The JG system gives people the freedom to know they will always be able to find work in their local community, strengthening community bonds which we know are weakened when those communities are atomised by the need to move away for work.
Obviously some people who cannot work for good reasons would be assessed and supported financially as now. Those who can work but chose not to would receive nothing from the JG system. They would just have to hope someone who sympathises with their position sets up a charity to help them out.
The UK government bond (gilts) market did not crash because of Kwarteng’s mini-budget. It was already falling due to the Bank of England’s decision to start unwinding QE and the contracts that many pension funds had entered into that forced them to sell gilts in reaction to falling prices. Kwarteng was a suitable scapegoat to distract the public and most financial journalists from the negligence of the Bank of England in allowing pension funds to enter into contracts that destabilise the gilts market and from the predictable consequences of 14 years of zero interest rates, QE, furlough payments and lockdown.
I didn’t bother reading this wall of turds pas the point where Fazi pronounced that a massive summoning of pounds out of thin air might reduce inflation. Life is to short to waste time on refuting obvious idiocy.
Maybe you should do a bit more reading, then, right or wrong, you’d understand the subject.
A good article but it’s not the markets or the budget. It’s a concerted attempt to get a government, with a 71 seat majority, with two years to run, out of power. By the usual culprits. By no means should Biden, Trudeau, Macron, VdL & co be exerting their “liberal” influences on their countries. The First World is turning right, the EU is diminishing if not towards a split, to a contraction. Heaven forbid the intransigent UK should succeed.
“The problem’s not the mini-budget — the problem’s the way in which we’ve allowed pension funds to gamble with people’s savings.”
Finally. That’s exactly what I’ve been thinking but this is the first time I’ve seen it in the press.
I think you’ll find the issues are a little more complicated Mr Fazi. “Borrowing billions to fund tax cuts that heavily favour the well-off, in the middle of a cost of living crisis, just as inflation is taking off…” Foolishness – political, economic, moral foolishness.
Yes, of course. Printing money means printing wealth. Everyone knows that.
Even if we accept 100% of your economic analysis, it still doesn’t support the conclusion of your headline.
As you point out, the measures in the budget didn’t amount to the stuff in the papers. But, as you also point out, our economy is highly financialised and a few unorthodox decisions here and there can easily create a panic.
In this case, with Brexit, the pandemic and a war, the conditions for a collapse in confidence, in credibility and in credit worthiness amount to something of a tinderbox. Chancellors who take the markets by surprise have only themselves to blame when there is a reaction. It they then go into hiding for a week, then the opprobrium is double earned.
Contrast a piece John McDonnell wrote in the Guardian last week. In it, he said, essentially, “we knew that the markets didn’t want a Labour government so we had spent a great deal of time touring the City and telling everyone exactly what we would and would not do, making sure that there would be no panic if we won an election”. By contrast, Kwarteng seems to have popped round to his former boss’s house to outline his thoughts so that, said boss was well placed to make a killing shorting the pound when the mini budget landed.
You can be right on the long term economics and still get the short term politics so wrong that it doesn’t matter.
We elected this lot (the party if not the leader) and we can elect the other lot next time if we don’t like the outcome.
I’m glad I have that choice.
Personally I’m pro the intent of Truss/Kwarteng bit they do need to sell it a bit better – I fear she is now a broken leader – everyone from the unions to foreign powers now knows she doesn’t have a backbone and can be pushed around.
Truss also has advisors who seem to have gone AWOL. Seems to be a Conservative thing as May found out.
“All of which means that while the tax cuts were bad from a distributional perspective, since they would have mostly benefited the wealthy, from a macroeconomic perspective their impact would have been negligible.”
It would have brought in more money for the government and thus more money for the welfare state. It would have helped the poor.
“Hysteria has derailed……….”
Now complete that sentence.
The game is endless, you can play it afresh every single day.
A very helpful analysis. Thank you
What analysis?
” Pension funds leverage gilts to pursue high risk investment strategies?” Where on earth did that nonsense come from? Pension funds are both self and regulation restricted, and are based on actuarial metrics, tied to client life expectancy…. they are NOT hedge funds, and although some may invest a small percentage of AUM in a ” fund of funds” hedge fund, even that is not common practice.
I do wish that commentators on this medium undertook even a modicum of research on fixed income and capital markets modus operandi?!
This is the age of hysteria. Hysteria about public health, hysteria about the climate, hysteria about the economy.
Fuelled by the internet and social media we are literally driving ourselves mad. Sane, rational tacking of problems is a thing of yesteryear. If only we had leaders with the wisdom and courage to stand up to this sort of thing. Sadly we don’t, as was most recently shown by Truss and KK’s horrific U-turn.
I wonder am I the only one here that sees economics as the modern form of astrology..
By examining the ‘data’ charts ( 🙂 ) it seems that everyone and his monkey can clobber together their own version of ‘why’ something happened (and incidentally, occasionally sometimes becoming extremely wealthy in the process – if they manage to convince a bunch of Scandinavians that they’re worthy of the Nobel Prize, for instance).. But no-one seems to be able to predict (as in ‘at the end of next month’) anything of any real practical use here..
Quote re 1987: “Hours after veteran weather presenter Michael Fish said there was no hurricane coming “but it will be very windy in Spain”, the devastating storm raged across the country and claimed 18 lives. A huge amount has changed since 1987.” … … … Well, yes it has. But regrettably none of it has expanded the accuracy of that long range weather forecasting window.. And interestingly (for me at least) Mr Fish appeared to have two labels, one as a ‘ weather presenter’, the other as a ‘weather forecaster’.. All the difference in the world there, I’d say. But extremely revealing none the less.
Would one of these experts here like to tell me how many dollars my pound will buy in January of next year? And will that figure be any more accurate than the one that some complete layman who likes to bet on the horses and is shown the exchange rate figures for the last year, and then asked to take a guess, might come up with?
Good article.
More sense here than in a thousand hysterical takes from the established press last week.
“Everybody else is mad except our gang” lol
Indeed – though I was delighted to read of Steve Baker’s recent change of view. Similarly, I look forward to one day hearing the regrets and apologies of the swivel-eyed loons behind & around Putin.
The writer is mistaken . Governments can indeed issue bonds and print its own Fiat currency. But that printed currency will only have the purchasing power that the market decides. Print lots of money and watch it buy less and less