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No way through the fog (TOLGA AKMEN/AFP via Getty Images)
Despite spending the past week poring over reams of spreadsheets and briefings, Rishi Sunak faces an inescapable truth: success is already out of his reach. Sunak may have delayed today’s Halloween Budget to November 17, but that changes little. When it comes to saving Britain’s economy, he has set himself up to fail.
On the one hand, he is expected to address the numerous economic problems afflicting Britain — the highest inflation rate in 40 years, an energy and cost-of-living crisis, a slow-motion housing market crash, strained public services, and growing industrial and civil unrest — while simultaneously boosting investment and economic growth. On the other, he’s expected to do all this while “restoring the confidence of the markets” by “fixing the country’s finances” — that is, reducing the government deficit and debt through higher taxes and/or spending.
These two objectives can’t be reconciled. Addressing the economic and social crisis, as well as mobilising the investment needed to boost growth, requires more spending, not less, which can’t realistically be offset through higher taxes. Meanwhile, attempting to balance the budget — which would mean allowing millions of households to slide into poverty, letting businesses go bust, and pushing public services to the brink of collapse — would likely make Sunak the third Prime Minister to be kicked out of Downing Street in as many months.
The good news for Sunak is that this is a false dilemma. The UK’s public finances don’t need “fixing”. As a currency-issuing nation, Britain can never “run out of money” or become insolvent on its public debt. I’m inclined to think that Sunak is aware of this; after all, he personally oversaw a massive increase in the deficit during the pandemic, which he paid for by having the Bank of England print the necessary pounds, essentially bypassing financial markets (and the issuance of bonds itself). The resulting debt is entirely owned by the Bank of England, and technically doesn’t even need to be repaid. There’s no reason he couldn’t do the same now.
The bad news — for Sunak and the country as a whole — is that the new prime minister can’t allow himself to acknowledge this simple truth. Not only has he long pushed the argument that his own pandemic support measures have created “huge challenges for our public finances” that now need fixing; even more crucially, in his rush to replace Truss, he fully embraced the mainstream narrative about the reason for her downfall: that she was punished by the markets for a fiscally irresponsible budget that almost destroyed the British economy — and that it’s now his job to correct her mistakes.
This narrative is profoundly misleading. As Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis, recently noted: “Markets didn’t oust Truss, the Bank of England did.” He points to the fact that the fall in the value of the pound was, in the grand scheme of things, rather negligible, while the gilt sell-off was largely caused by problems inherent within Britain’s over-financialised pension funds — itself a result of regulatory failure by the Bank of England — and then exacerbated by the announcement that the Bank’s bond market intervention would be short-lived.
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SubscribeThis is how neoliberalism dies, as one bought and paid for technocrat after another tries and fails to put humpty dumpty back together again. Sunak hasn’t set himself up to fail as much as been handed an impossible task by his backers. If a customer asks for an apple and he’s given a turnip, he’s likely to go elsewhere. If the next shop also gives him a turnip, he’s likely to curse that guy, slam the door and go elsewhere again. Every turnip just makes him angrier, until sooner or later the customer stops asking nicely and instead decides to burn the shops and take the apples. Globalism can’t be saved. People WANT their governments to stop the free flow of goods, people, and money and act in the interests of their citizens, not the other way round. The sooner the establishment accepts this basic truth, the less of their stuff will be stolen and burned.
‘People WANT their governments to stop the free flow of goods, people, and money and act in the interests of their citizens, not the other way round.’
I’m not disputing the thrust of your point, however let’s at least recognise that a lot of the same people now calling (entirely reasonably) for deglobalisation are often the same people that really quite liked cheap Chinese goods, wage arbitrage in certain sectors and the like. We got to the point we did because the angst of a million talkboard thinkpieces wasn’t reflected in the real world. Not I hope a comforting thought for those who think the internet is the real world.
I suspect that when you say this is how neoliberalism dies you really mean this is how corporatism dies.
The article is quite right to question Rishi Sunak, but if anything the real point seems to me to be the rather bizarre assertion at the end of the article. ‘The populist window that had opened with Johnson and Corbyn has now been firmly closed.’ What exactly is ‘populist’ about the notion of a greater level of national self-sufficiency, citizens first and the like? That’s not populism, that’s democracy.
It is populism in EU land, it is democracy in the UK…
Corporatism is probably a more accurate term, insofar as it refers specifically to the economic policies of neoliberalism vs. other aspects of neoliberal philosophy. Populism, at least recently, has been used as a pejorative by the media and the establishment to describe whatever policies that are popular with those ignorant peasants who are too stupid to know what’s good for them. As you point out, there’s nothing anti-democratic about populism. In its modern form, it’s a profoundly democratic movement that attempts to take power away from unelected corporate boardrooms, international organizations, and global oligarchs and return it to the elected governments that are supposed to be the highest authority in a given nation.
I am not sure how historians (we wont let economists near) will describe the Western economic system 1990 to 2022. It began as hyper globalised capitalism, smashing Western working class and manufacturing but making services rich, enganced by the unfolding digital revolution. The hyper capitalist EU did a similar number, shattering national labour markets. But after its meltdown and Crash, a New Order began. It is absurd to call it neo-liberalism! It is an Oligarchial Quasi Socialist System more akin to East Germany in 1980s than free enterprise. The State Bailouts everything, everyone and the rescue medicine – QE – creates a new class – the propertocracy (most of us) – by blowing a bubble in the assets of the rich. A mirage dependent on high taxes and the permanent elimination of The Order- Buster – inflation. Well He is back. Globalisation is smashed, our national resilence smashed. But please do not call that Order neo-liberal. Nor damn the populists who expressed the first protests at this epic criminal mismanagement by our failed elites.
You’ll find it is socialism for those “too big to fail” and austerity for the rest. The transfer of wealth from the 90% to the 10% is testament to that. Real wages have been in decline for many years and social services have been cut to the bone. No socialism there!
Money spent on the poor and even middle income groups is re-spent quickly and locally and so boosts the real economy quickly and very beneficially.
On the contrary money funding the obscenely rich is stashed abroad or spent on high end foreign yachts and villas with zero benefit to the national coffers. But the latter was the core reason for Brexit (the EU was coming for such tax dodging funds) and merely exacerbated an already hige problem.
Remember when government’s job was redistribution because inevitably money moves from poor to rich but gets spent over and over along the way and is taxed every step of the way? For years it has instead been the magic money tree of the city! A quasi Ponzi scheme that had only one ultimate outcome!
wealth = spend, investment, saving… which = business expansion, profit and more jobs….
I am a democrat
You are a populist
He is a demagogue
A overly simplified but nonetheless fair assessment.
Populism is stuff that is popular with wrong people according to the right people…
Last time I looked it up, “Populism” meant “Politicians offering people what they want, in order to get elected”.
So “Populism” means “Politics”. Glad we got that sorted out.
Isn’t that exactly what “democracy” means?
“Offering” yes: delivering? Not so much! But rhe latter is also ‘populist’. It’s just a rarer version.
Isn’t populism what the people desire, at least superficially? And democracy a method for electing officials to carry out those desires?
Democracy is where the people take precedence over parliament.
A republic is where parliament rules the people.
In practice, that means that in a democracy a referendum result overrules parliament; in a republic parliament can overrule a referendum result.
As no less a figure than Michael Heseltine made clear at the time of the Brexit referendum, Britain is a republic (albeit a republic with the vestigial remnants of an ancient monarchy somewhat incongruously tacked onto it).
There is only one true democracy: Switzerland. Subject to getting a stipulated percentage of the electorate to sign a petition, any Swiss citizen can force the government to hold a referendum. The result of that referendum is binding on the government, and overrides any laws which conflict with it.
With all this in mind, we can reflect that Switzerland is per capita the richest country on earth, and has been at peace for longer than just about anybody else.
Direct democracy is an excellent system if the nation in question is small enough. It’s impractical for a large nation like the United States, Brazil, China, etc. I wouldn’t mind seeing the world divided up into self-governing Switzerland sized pieces though.
So anti-populists are probably warmongering greedy, inept opportunists? Yep: sounds about right to me!
So true, and also not a member of the EU: quite why successive governments have been incapable of invoking policies used succesfully by Switzerland and other tax havens, I simply cannot fathom… AND no one knows or cares who the Swiss PM is? PLUS they have no immigration problems.
I don’t think so. Politics is about power and interests, it is not the same thing as government and the allocation of power. [Electioneering is I think something totally different.] Populism, at least in the modern sense, I think is an identifiable political phenomenon around power and interests.
It may well not be coherent in a classic left/right sense but it does I think have an identifiable core idea of ‘elites’ being in tension with ‘natives.’ It’s not really nationals v outsiders, rather citizens within a polity having a profoundly different world view, interests and who thus want different power relations.
Those terms ‘elites’ and ‘natives’ could of course mean all things to all people (as was true of ‘working class’) and may well not be consistent, but populism in itself stands. For example the ‘left populism’ of Podemos or Occupy Wall Street had politics far more in common with UKIP to the extent that they were about power and interests within and between citizens as a group.
You ask, ‘Isn’t populism what the people desire, at least superficially?’ But what people – those who find open borders to be to their taste or who want more international aid spending? To my mind populism is more about new structural features in all our societies and populists are those who look to new cleavages around the ‘elite/global’ vs ‘native/local’ divide to optimise their allocation of power.
In my view the key idea is not necessarily democracy. There is nothing per se to say that those in an autocracy can’t live a good life. Rather the key concept is civil society and it is western civil societies that have been battered by bad trends.
What we really need in the west is for political parties to return to a true civic role. That more than anything would act as a salve for our riven people.
‘Populism’, classically defined, is a suspicion that those with the power to decide and enforce the rules and conditions for people living in a society have outside interests that conflict with those of the population as a whole, so that power should be returned to, or taken by, the populace. HOW that is to be achieved is not clear: for some, a ‘people’s champion’ (who easily assumes the role of dictator); for others, a more rigorous application of democracy (which easily morphs into the stranglehold of communist committees. Switzerland is, perhaps, the model that most populists would hope to emulate – but Swiss democracy requires a level of informed participation that other societies seem unlikely to adopt for more than the odd, brief moment of engagement. Failing any of the above, single-issue groups of citizens, with or without ‘leadership’, will continue to coalesce and use the power of disruption and the threat of violence to force their particular demands to the top of the political agenda.
Let’s acknowledge the problem and appoint a Royal Commission to examine it from all angles! That should waste a few years (and a lot of money) and, maybe, by then, the populace will have gone off the idea!
“act in the interests of their citizens” Indeed, hence the reason Trump appeals to so many voters in the USA, The left leaning MSM refuse to even mention the good things Trump achieved even under extreme pressures to bring him down with false narratives, e.g, Russan Collusion………. We see the same with Nicola Sturgeon’s “Scotland this, Scotland that…. SNP unquestioned version of populism at work.
Generally, any mention of populism is immediately labelled ‘extreme right wing’.
We’ll have to find an alternative word to separate ‘good’ populism from ‘bad’ populism! Even a Royal Commission is unlikely to succeed on that on I fear!
Pure democracy yes: but we have Representative Democracy, ie we expect our leaders to lead as well as please the inexpert populace.. Populism freaks out the markets: pandering to the markets freaks out the populace. In my inexpert opinion the deal recently has favoured the markets far too much, working as they do on factors largely outside every country’s control.
The populace yearns for local control (as the Brexit vote proved but the actual result showed GB like all nations (except the US) are mere slaves to the markets. They sold their souls for cheap goods with no vision of the longterm fallout and heavy dependency on precarious supply chains and self-serving oligarchs..
Localisation is indeed as an important part of the answer as it restores real control and better communities both of which are needed desperately for cultural as well as financial reasons. Globalisation has gone the way of all Ponzi schemes..
Neoliberalism is just too often an ill-defined ‘boo word’ used in a rather incoherent and inconsistent way (why exactly was Liz Truss so recently exalted by so many on here, a neoliberal personified, except that she wasn’t Sunak?). But she read the runes wrong and did not realise (which she should have done) that the days of zero interest rates and easy lending were over.
You are right to point out that the public don’t have some consistent belief in a concrete policy called ‘populism’. At least since British industry became a laughing-stock in the 1970s, the public have been notably ‘unpatriotic when it comes to what they buy, however much they, say, supported Brexit.
If ‘populism’ means championing several entirely contradictory policies before breakfast, then however ‘popular’ it is, it won’t last long, which is exactly what we have seen when (most) populist governments have been elected.
As far as deglobalisation is concerned, I’d say, be careful what you wish for. We do need to achieve better security when confronted by unfriendly powers. But the days of protectionism and attempted autarky were not happy ones in the 1930s and led to a calamitous loss of world income. Perhaps we can do a bit better this time, but I wouldn’t bank on it.
The last point is that the internet very much is the real world, our economies are now highly dependent on it. Of course, it has a real physical infrastructure. The major undersea cables are very vulnerable, and usually I understand simply laid on the seabed and not even in trenches!
Do they? Do they want their supply of iPhones, bananas, solar panels, etc etc etc to stop? ‘Neoliberalism’ is pretty much now always a poorly defined ‘boo word’ of the Left. Economic autarky has been tried on many occasions – and it did not increase the wealth of its citizens. In fact your parable couldn’t be less apposite, the society you support wouldn’t HAVE any apples, only turnips!
The word ‘backers’ sounds like quasi conspiratorial nonsense. If these never-never lands of endlessly printing money produced wealth and leisure for all, wouldn’t they have been well and truly established by now? After all there is nothing politicians would like more than popularity and an easy life.
We have now had the Left, many times, and now the populist Right, promising easy solutions. They have largely presided over chaotic and incompetent administrations.
“Economic autarky has been tried on many occasions – and it did not increase the wealth of its citizens”.
By “Economic autarky” do you mean a country being a monetary sovereign?
Could you provide “many” examples to back up your assertion above please?
Are you saying we should go back to the gold standard and a fixed exchange rate?
“We have now had the Left, many times, and now the populist Right, promising easy solutions.”
Could you provide “many” examples please? I don’t think the Tories are promising anything remotely easy, are they?
Absolutely love this part of your comment, gave me hope there’s some sense left out there: ‘Do they? Do they want their supply of iPhones, bananas, solar panels, etc etc etc to stop? ‘Neoliberalism’ is pretty much now always a poorly defined ‘boo word’ of the Left. Economic autarky has been tried on many occasions – and it did not increase the wealth of its citizens. In fact your parable couldn’t be less apposite, the society you support wouldn’t HAVE any apples, only turnips!’ Last sentence, just brilliant.
This right here is what I consider common sense people, people have traded across the globe for thousands of years, I do not think we should stop trading with the world, think we would be pulling the rug from under our own feet. Unless you want to go back to like subsistence living or build everyone a nice eco home with veg garden etc. so we could exist without these things. And then you’d probably need to import more than half the stuff to make them work, copper, lithium, solar pvs, inverters, timber, stone, sand (shortage of that too) and on and on….. I see the only uk battery maker is on the verge of bankruptcy today. No UK batteries then. If global trade dies, your way of life dies.
There seems to be a recurring thing on here confusing the ‘globalist liberal elite’ with the concept of ‘globalisation’……like if your for globalisation then you must be for the Liberal global elite? The two things are completely separate matters.
Obviously, nobody wants to ban all trade or all immigration, or all foreign investment. That’s a straw man argument. One doesn’t have to choose between an open borders, one world free for all and strict isolationism. There is a balance to be struck between the extremes that considers political beliefs, cultural values, domestic stability, not just pure macroeconomic efficiency. And while we may not be able to grow bananas or mine lithium in my home state of Kentucky, I’m pretty sure iPhones can be built here or anywhere.
There were and still are winners and losers in Colonialism, Unfair Trading, Regime toppling etc. The losers were invariably all foreigners (except when oligarchical greed preyed even on their own).
Time comes when the exploited smarten up and the game is over.. there is a limit to how many dirty tricks can be played no matter how inventive the players…
The establishment have zero idea what’s really happening. They probably know, in their heart of hearts, but they dare not admit it to themselves. They have failed. They are trying to use the same things that have failed to keep their power and privileges. The only way out of this is massive cuts in government spending, massive cuts in taxes and massive reductions in the size and scope of The State. Turheys do not vote for Christmas.
Turkeys would vote for Christmas if we reverted to our old tradition of roast goose
The end of globalism may be what the population wants. However, the relative standards of living in the West and in Asia would be very different from what they were in 1990. The British would find that their salaries would buy far less of domestically produced goods than they did in 1990.
“Neoliberalism” is simply here a boo word. We don’t live in anything like a small state society or indeed a particularly entrepreneurial one, with an immensely complicated tax code and masses of often ineffectual regulation. It seems in this case to mean any notion that a government’s income, spending and a nation’s productivity ought to be in some sort of balance, or that there are ever any hard choices to be made.
As to what the ‘public’ want, well they of course want all sorts of contradictory things. The fact that 99% of the population might vote for increased pay and reduced taxes, doesn’t make this a remotely realistic programme for government economic policy. If you borrow money, it tends to mean that your lenders have some power over you. You can default, so you don’t voluntarily get lent the funds again, or more realistically, that it costs much more to do so. Even the experience of the old USSR showed that. Ok, you can sequestrate some assets, thus making it much less likely that international businesses will ever invest in you. Even with immigration, which is undoubtedly far too high, we have become very reliant on foreign labour, including in the NHS and changing this culture will be a very long-term project (how long does it take to train doctors?), not something that a populist government can fix in their usual short-term timescales with a few slogans.
If it sounds like fantasy economics, it probably is.
This tiresome claim – which always precedes a declaration that the answer to a lack of money is forever and always to magic up or borrow more of it – ultimately boils down to “no problem guys – the money printers are perpetual motion devices and can never run out of ink”.
Phew.
Also rather handy that it wasn’t in any way the response of the markets that destroyed Truss’s economic plan. It was those dastardly guys at the Bank of England – nothing more.
Its perfectly obvious why the author wants the reader to believe this assertion: to think otherwise is to become aware that gigantic debt burdens place countries in the pocket of their creditors and severly restrict a governments scope to deviate from (what has become) economic orthodoxy; an orthodoxy that (rather handily) keeps nations paying billions upon billions in interest payments. This is a intolerably inconvenient argument against his thinking and so must be strangled at birth.
Well, I’m afraid I refuse to disbelieve my lying eyes. I can see perfectly well that MMT is the reason the world’s economy is about to go down the toilet. I can also see that its this thinking that permits lunatic behaviours like the extended lockdowns, not to mention the blindly obvious fact that adopting the attitude that money’s never a problem for a country eliminates the motivation or apparent need to ever be careful with it or increase efficiency and productivity.
How the author cannot see this is frankly scary.
Well said. Thomas constantly argues for more State intervention more spending to escape…the horrors of MMT or Bailout Addiction since 2008. It is extraordinary that he and the Left clasp to this fiction when the house is already on fire. Successive mass bailouts from trillions to Bank, trillions on QE and then the insanity of two year lockdown created a giant ticking H Bomb under our societies. As long as globalisation worked, our idiot Central Bankers could convince themselves that the fuse…inflation.. was missing. But the fuse is now in and the Bomb is ticking. The Bond Market is a reality and now will cut down the Tres. Money IS real. Rishi is smart enough to know the game is up and is correct to evacuate us in an orderly fashion. It is plain that the 30 year New Order of Blairism with its mass welfarism, mass uncontrolled migration, vast Blob, high taxation, crushing EU regulations, equality mania, propertocracy and now Pol Pot like Net Zero fanaticism is destined to crush enterprise and implode. Pouring more money on the fire just means the Great Depression will turn even nastier. We are THAT close…
Thinking back I remember that until 1997 money was always tight. I had a business that provided a good income but you still had to watch the bills in much the same way as our parents did.
From 1997 we suddenly become increasingly more prosperous. Wages went up, the cost of imported consumer goods fell, food prices and energy costs decreased relative to income, house prices rocketed and there was a huge hidden increase in the cost of services. These last two items, house prices and increased cost of services, merely served to fuel the sense of increased prosperity.
We did nothing to earn this increase prosperity an it is all now starting to look like a bit of a Ponzi scheme.
Indeed. A Potemkin Village. A Ponzi. Shame forever on our metropolitan poltical classes. They meerily gorged on the property bubble and showed utter indifference to its social and regional inequity. Let them Eat Gammon!! When the Gammons threatened their 100k per annum midas machine with Brexit, all were branded raycists in their hysteria. These same progressives with double kitchens and BLM stickers are today ranting about the evil ‘unearned’ profits of oil firms but strangely silent about their own million pound enrichment over the past decade. Haycart and justice time methinks…
He’s a narrative pusher in the pay of the MMT charlatans, so we always get articles like this from Fazi. It’d be funny if they’d just give him his own little press and say “Here, Sonny. You have our permission to print your own funny money. Good luck!”
It’s much more convenient to trot out the Magic Money Tree response (what’s not to like about free money?) than to grapple with problems posed by a balanced budget and the imposition of “austerity” (aka living within your means).
However, postulating that “the gilt sell-off was largely caused by problems inherent within Britain’s over-financialised pension funds” mistakes the symptoms for the causes. The gilt sell-off was due to the absence of any funding plan with Truss’ mini-budget, so the markets assumed it would be deficit funded and took fright, pushing interest rates up to a level which triggered margin calls on the pension funds over-leveraged positions.
Certainly the Bank of England was asleep at the wheel (not the first time in the case of Andrew Bailey) but one has to question why those pension funds were so over-leveraged. A decade of near-zero or even negative interest rates on bonds pushed them into ever more risky derivatives if they were to have any hope of ever meeting their unfunded liabilities. And off-the-charts fiscal incontinence during Covid left the government with no room to manoeuvre. If there’s anything Rishi can be accused of it’s being an arsonist posing as a fireman.
You are mis-representing MMT, though. I can understand why. To accept the validity of MMT makes it more difficult to present convincing arguments why it shouldn’t be followed (or rather why MMT itself says that the basic principles shouldn’t always be followed).
MMT Primer: https://www.vox.com/future-perfect/2019/4/16/18251646/modern-monetary-theory-new-moment-explained
The problem in the UK is that there’s no party that favors the domestic production of oil and natural gas. There are too many Green Tories. Sunak has returned to the policy of banning fracking. How does this make sense for the UK economy, where 75% of its domestic energy comes from oil and natural gas? In the US, the Democrats’ energy policy is about to cost them big time in the midterm elections, because Republicans are almost unanimously in favor of drilling and pipelines. But where do UK voters turn for a rational energy policy?
The global disaster is of Biden/Boris – and thus the Exchequer Sunak’s, Fault. They printed money insanely. for no reason, for a flu which conventional medicines, if used at onset of symptoms as is done in every last illness, had been used, – then covid has a low bad outcome rate. But – no, they wanted to lockdown and spend, spend, and spend, so they prohibited early treatment to force the vax. Now the bill collector is here at the door. Remember
”Inflation is Always and Everywhere a Monetary Phenomenon” (Milton Friedman)
”The UK’s public finances don’t need “fixing”. As a currency-issuing nation, Britain can never “run out of money” or become insolvent on its public debt.”
Well, that is basically insane, or MMT, as its technical name, or is a policy whereby one just ‘Spends One’s Way Out Of Debt’
Take Friedman’s truth – that the dollars (or £) you add to the system cause inflation – if an equal amount of productivity, goods, services, is not also created to absorb it.
See – what happens with the writers plan of just creating more £ out of air to pay the people’s bills is that it just causes inflation. Inflation is a TAX.
Print a Trillion £, do not increase the amount of goods and services – sure, the Government has a £ Trillion to spend – but they got it by Debasing the value of every pound already owned by the public. If there were 9 £Trillion out there circulating, well the gov just spent another £Trillion, and now every £ you had in your pension, bank, assets, is now 90 pence in real terms, in spending power it lost 10%. Magic – You were Taxed 10% by the stealth tax called Inflation. But not to worry – the mega wealthy, they are not bothered by inflation as they have ‘Appreciating Assets’ so it cost them nothing – because it is a ‘Regressive Tax’ – it is paid by the pensioner, the poor, the working, by deprecating their money’s spending power. But no problem – increase their wages and pensions… and then just print another £Trillion to pay for that…. An Inflation Death Spiral.
At least Proper tax and austerity are Honest Government paying the real costs of government spending – printing £, causing Inflation – it is a Stealth Tax on everyone to pay for government spending.
But yes- the government has to decide, Recession or Inflation. At this point inflation may be the lesser of two evils, and so a bit of QE perhaps, slowing the interest rate perhaps, no QT…. But it is NOT FREE MONEY! Every bit they print will be paid for, just by who, and how, and when, is the question. (the answer is: by the children, by them not having as much as you did, when they are adults)
Inflation is a Tax is going on my T shirt. The die is surely cast now..I cannot see how even a numble Rishi can arrest an impending recession and crash. Biden is criminally negligent to stoke inflation AFTER lockdown. I heard Gove proposing yet more bailout to the entitled in rents yesterday – this on top of the 30bn Housing and 30bn Brownite tax credits and Energy. This is the politics of the GDR. The State has bent warped destroyed the functioning of market and stomped on the notion of individual responsibility. Rishi must look to a post Crash world. Start the process to overturn the NHS model with a French/German system. Control all migration. Change the Equality Laws to excise the CRT elements. Torch the Quangos. Support SMEs. Stop the Net Zero fanatics now. These reforms would give some hope of rebirth after the devastation of the impending Crash.
Just trying to work out if ‘numble’ is a misspell of nimble or numpty? lol.
Otherwise, agreed 100% (except for following any syatem created by the French/German – shudder!)
You have me Jacqueline. Twas nimble! Though maybe there is something in this new word numble; a nimble numpty!! That might well define Rishi if he does not live up to his word on the border crisis, equality mania and get Net Zero tamed.
The problem for the Friedmanites is that the 2010s was a period of relentless and serious quantitative easing (a.k.a. printing money) and of very low inflation. Those who learned economics from a 1980s textbook spent the whole decade predicting that inflation would swiftly and inevitably follow — and they were wrong year after year. Inflation only soared when serious supply-side shocks hit. So don’t believe any of this deterministic stuff about expansion of the money supply inevitably causing inflation. It’s what we learned in those textbooks but economics as a discipline has (for all its faults) long since adopted much less simplistic understandings. Instead, focus on what really causes and, more importantly, what accelerates inflation: commodity supply; wage restraint (or lack thereof); labour shortages; and so on.
Combining US restrictions on energy production with the sudden explosion of buying following the pandemic lockdowns and the built up quantitative easing of the pandemic was certain to cause inflation. The pandemic restricted supplies, while printing money meant too much money chasing too few goods once buying restarted. Slowing oil and natural gas production amplified the effect.
I see – you do not understand QE, or Friedman.
First – QE is ‘Bank Reserves’, it is not money in the system. It makes loaning on productive things easy as the banks are plush with reserves, and also the Interest is kept to near Zero. QE is not really money – it is Not M2.
Second, there was growth in productivity, and greater than inflation, and if you produce money AND Growth ie – goods and services, they absorb any more money in the system. (that this was spurious growth – like companies buying their own stock with zero interest loans, only hits the fan now – but then it was called growth as it increased stock values – it is a weird system.
But shut the economy so production of goods and services is hugely dropped – WILE releasing $Trillions of cash into the system = Friedman Inflation.
“They printed money insanely. for no reason, for a flu …”
COVID wasn’t the reason but the excuse. The reason was to enrich themselves and their friends and, ultimately, to topple the West.
During the period of “austerity” the national debt nearly doubled. That seems to be a funny sort of austerity to me. Hardly post-war style austerity, were basic goods were rationed.
Austerity now is not having the services and benefits that might ideally be desirable or desirable at least to those with a stake in them. The trick Osborne pulled off was to reassure the money markets that austerity was being imposed without actually imposing too much real austerity which really would have been politically unpopular.
The real Uk economic issue is never mentioned. An increase of 10m in the population . Most of whom are either economically inactive or low waged and not paying much tax- but all of them using public services.
Of course there’s ‘fat to trim’ from the public services. For a start, the de luxe, taxpayer-subsidised pension arrangements of public sector workers, far more generous than anything available in the private sector. But don’t expect any government to dare touch them.
And MP’s should be first in that list!
MMT might be a viable financial philosophy for a country like the USA, which can get by without imports, but it would be suicidal for the UK.
Nobody should write about economics until they’ve spent at least ten years at the sharp end.
You fail to understand the Global Reserve Currency.
See – all commerce is done in Dollars – and if you want crazy look up ‘EURODOLLAR’. See all the offshore banks make loans in USA $$$$ – and everyone needs those as all commerce is in US$.
Say you want to open a mine. You borrow from offshore banks in Eurodollars – a Dollar Denomiated Debt. With those $ you buy the heavy machinery – the pilelines, the ship docks, the roads – as that is all anyone will accept.
Not you are a foreign country that have ‘Dollar Denominated Debt’ which has to be paid in $$$ – so an endless supply of US$ is needed.
To satisfy this USA takes in imports – and exports paper called Dollars backed by nothing.
BUT IT IS WEIRDER THAN THAT!
To get a Eurodollar loan you have to collaterize it with USA 10 Year Treasury Bonds! So you have to sell your currency, convert it to $, and buy US Treasuries as a deposit for your EuroDollar Loan – (from an offshore bank – who are loaning in $ even though they have nothing to do with USA – wild S*it..)
This means USA has to export $$$$$$$$$$$ by the Billions to satisity the need for collaterial, and to service the debt – this is why USA can spend much more than it produces – go look it up – crazy!
And this is what Biden is destroying by blocking Russia from SWIFT!!!!!!!!!!!!!!!!
Fazi is an idiot, whose understanding of economics is nil, whose grasp of facts is tenuous,and whose plausibility is alarmingly weak, even for a socialist. What is he doing being given space in a publication that is supposed to be about original thinking?
No more, please.
Well said. I presume he gets paid for these articles, from our subscriptions and is therefore taking up space which someone with greater insight might occupy.
And no… before someone posts “it’s because you disagree with him”… it’s about the quality of thinking behind the articles.
It is precisely that; I want to read new ideas thoughtfully argued, original thinking, a moving on of the “conversation”; not old junk regurgitated
So you disagree with his thinking. It’s not quality. Surely a subjective response. Withdraw your subscription if you feel it’s being wasted.
Benjamin Graham has pointed out that in the short run, the market in company shares is like a voting machine–tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine–assessing the substance of a company.
The same applies to the perceived value of a countries currency. If politicians make moves that unsettle the currency traders the value of the currency will fall irrespective of the underlying facts but in the long term if a countries politicians pursue policies that are more fiscally lax than other countries the vale of the currency will depreciate against other currencies. In the short term politicians need to reassure the currency traders that the countries finances are going to be no worse than competitive countries. They must maintain the illusion of confidence. That is something that both Margaret Thatcher and Rishi Sunak grasped and Liz Truss did not.
What Rishi needs to do is cut the relatively useless areas of government expenditure and preserve the essential areas. That is the hard part which is seldom achieved because those for the most part in charge of distributing cuts are cast members of the relatively useless areas of expenditure and so have every incentive to cut the relatively useful elements instead. Easy cuts are usually the wrong cuts. I can’t say I am optimistic that the right cuts will be applied but at least Rishi has a better chance of keeping the illusion of fiscal rectitude going as far as the currency market is concerned.
No fat left to trim in public services?
Public sector pensions are notionally funded by employees contributions (average 10.4%) and employer contributions (average 20.2% – read it and weep, private sector). These are then paid into Government general revenues, out of which existing pensions are also paid. These are accounted for in the Budget and announced to Parliament using SCAPE – Superannuation Contributions Adjusted for Past Experience – an idiosyncratic and discretionary valuation introduced by Gordon Brown. In 2019/20 this amounted to some £49 bln in payments, covered by £47bln in receipts.
Pension law however requires the Government to value pensions according to IAS19. The difference between the two was some £57bln MORE on IAS 19. These figures are released in arrears in the Whole of Government Accounts. With the rise in inflation (public sector pensions are mostly index linked) the difference is likely to be over £60billion now.
To put that in context, the State pension, paid to over 11million people, costs some £84bln.
Those are staggering figures. Thanks for sharing them. How many people are covered by public sector pensions as compared to the 11m receiving State pension?
Many thanks for that erudite explanation!
This could be grounds for a Civil War.
Sorry but I can’t help myself: poring over
There are some simple actions that Sunak can take:
As does Italy, Germany, Japan and others:
• Sell Gilts retail, via the post office and tap the UK savers demands, ensuring the gilts are predominately sovereign based.
• Create ” guaranteed in default only” long term 30 yr + bonds for long term and infrastructure spend, so taking these costs out of the actual old PSBR.
• Reintroduce banking/ investment confidentiality secrecy to attract inward investment.
THEN radically cut taxes
AND introduce health insurance tax incentives
28 days extra Piquets!
Commanding Officers Orders, 0900 hrs.
BoE independence worked for a period, while grown ups like Eddie George and Mervyn King were in charge. It has clearly now failed and incompetents like Bailey are completely insulated from accountability.
Treasury officials and the Bank combined to undermine Truss and our wonderful media gleefully joined in.
Kwarteng and Truss’s big mistake was to let the blank cheque of the energy bills support scheme run for two years, instead of six months: “Let’s get through the winter then reassess”. This is what spooked the markets but, as the policy was very popular with voters, the media were only too happy to place the blame on “unfunded” tax cuts (a logical nonsense if ever there was one).
Fazi gets much wrong but his concern about our vanishing democracy is bang on the money.
Excellent comments out here, everyone!
We can all connect dots ex post and rationalize what happened when, perhaps, it could make more sense to step back and cite things like Herbert Stein (to the effect of) “unsustainable processes eventually stop.” We just don’t know when they will stop. Timing markets is tough.
I am a little surprised that this piece seems to blithely imply that “printing money” is no big deal. Printing money does not, of course, create value. It does, however enable the government to arrogate to itself a larger share of buying power over the value that the economy yet generates. It amounts to securing a a larger slice of a diminishing pie. Where does the process end?
Three letters. GDR.
The Author is mistaken.
There is an huge difference between a one off funding in an emergency (Furlough/Pandemic) and a deficit on your current account.
Your bank manager will lend you money to deal with a one off drama- but he won’t lend you money if your wine merchant’s bill is bigger than your salary.
One-off?
First came the crash of 2008, then COVID (and went on and on and is still ongoing), then the gas prices.
It seems to me that these “one off” events just keep on coming.
(And yet there was no money to help the people stuck because of the cladding scandal).
“As a currency-issuing nation, Britain can never “run out of money” or become insolvent on its public debt.”
That just failed O level economics. It ignored the other definition of money. “a store of value” The country may not become insolvent but its currency depreciates if you print too much.
See Zimbabwe for example
Also ignored the fact that no-one may wish to lend to us.
Simple question about a premise of this article – in what way is investment dependent on greater government spending?
Improving infrastructure for a start.
Which only works if the government spending is on works which increase productivity. Easing road congestion, in the long run education (if it improves worker abilities), curing the otherwise productive sick. But investment is otherwise rightly the province of the wealth creators, not the Whitehall big spenders
Yes, I agree, certain government-funded improvements in infrastructure might encourage some forms of investment. On the other hand, ironically, a lack of infrastructure might attract entrepreneurs to build that very infrastructure. It’s more complicated than the old ‘build roads and educate people and businesses will come’
Right on. And that was just one of the many heavy premises in this piece… if we even call it a premise. I’d even suggest, “It’s not even wrong!” … meaning, there is an ambitious proposition buried in there somewhere, and we may puzzle about what it is. But what is it?
What better way to “invest” than with other people’s money?
“Addressing the economic and social crisis, as well as mobilising the investment needed to boost growth, requires more spending,”
To be clear the spending was in addressing the economic and social crisis, not just investment. I don’t think he said investment depended on spending. He saw it as a way of mobilising investment. I guess tax incentives to business would be one way of mobilising investment.
How can he possibly change anything when he and his party were responsible for creating this mess. He has to admit they were all wrong and he will never do that.
Economically Britain is not an island and never will be, if we want to maintain our standard of living. Sterling like all currencies is fiat. It is only worth what people we trade with (markets) think it is worth. In reality it has been over valued for decades (certainly since the First World War) compared to other currencies, particularly the US Dollar which took over primary reserve currency status from Sterling between WW1 and WW2. We run a trade deficit permanently and it’s growing and we are obsessed with ever increasing price of a non-productive asset (property). The price of housing makes us globally uncompetitive because we need to earn too much just to put a roof over our heads. If we create ever more money for ever more government spending, other countries (the market) will feel it’s worth less and less and hyper inflation results (see Argentina, Zimbabwe and Weimar Germany for examples). Whilst currency is fiat, you have to play by the rules of market confidence. End of.
The abject failure of so say independent Regulators is a major issue. BoE, Ofgem, FCA, OGA etc etc – all terrible failures. Sadly the Civil Service is now no better. A significant clear out and reformation, centred one might hope on introducing an element of accountability, is needed – but which political party has that on its agenda?
‘economist Richard Murphy’….sorry, no credibility after that
Sunak cannot achieve everything that he might like to achieve, but if he can bring inflation down, that will be success enough.
Inflation means rising prices and rising interest rates. This causes anxiety and uncertainty about the future. High interest rates put homes at risk. Uncertainty about rising prices leads to pay disputes: if settlements are too low, poverty results; if they are too high, jobs are at risk.
One of government’s responsibilities is to protect the value of the currency. Other responsibilities include poverty/inequality and the quality of public services. Government can’t do much about growth – that is up to businesses and their customers.
Inflation means rising prices because of excess money searching for too little goods and services. Like throwing trilllions into the market that is shutdown due to Covid hysteria. End of story.
Without inflation, taxes must be raised. I think the implication of what you’re saying is that tax hikes cause less problems than inflation.
Indeed they do. First, they serve a purpose: to provide public services, from which we benefit. Second, they can be targeted on those able to pay (that’s most of us).
Stop all pocket money. Watch the sweet shop and the toy shop close.
Fazi says “restoring the confidence of the markets” entails reducing the government deficit and debt through higher taxes and/or spending (sic). I don’t think so. The basis of market confidence is more emotional than mathematical. Much confidence has already been restored merely by Sunak not being Bojo or Truss. I think we could all be surprised by how little he raises taxes or cuts spending in the forthcoming budget. Markets will put more store in their perception that there is at long last an intelligent person at the helm, and one who will make good decisions at the right time.
Rishi’s plan for austerity is a specific form of austerity that excludes the government, the public sector, and the political class. It is going to land wholly upon consumers, taxpayers and privately-owned companies whose business doesn’t depend on the State.
It would be bad enough if a Labour government did this – even the silliest excesses of New Labour under Gordon Brown didn’t do anything as reckless as this – but for a Tory government to do it is insane.
I decided after the Truss/Kwarteng establishment stitch up that I would not be voting Tory again. Everything I’ve seen since then has hardened this view into a certainty. This government is unfit to hold power. The fact that the Opposition is probably even worse is not the point: the system has failed.
From Milton Friedman, Econ Nobel Prize Winner, we have: P = (M * V) / Y where P is Aggregate Price, M is Money Supply, V is Velocity of M and has non-linear dependency on M, and Y is GNP. Hmmm, I wonder where all this inflation has come from?
Excellent article with which I couldn’t agree more. The attacks on Truss were utterly shameless and hypocritical. Government, the Treasury, the BofE are all to blame for the depth of the mess we are in.
That’s not what Red Fazi is trying to say. Unless you are being deeply satirical
Remember Liz Truss was being attacked for her policies and lack of a coherent response by both sides of the House of Commons, the MPs representing the views of their constituents.
Without any support in our legislature, she could not continue as Prime Minister.
I didn’t say she could. Neither could Boris who was useless. I said the attacks were shameless and hypocritical. That is simply my opinion. As it is my opinion that Sunak and Hunt won’t prove much use. I used to work in banking and capital markets and a lot of it is ballos. As for the BofE and the Treasury……
Of course he’s not doomed. Cancel the aid budget; put all mortgage’s on hold for 5 years; tell oil and energy companies that HMG will take a one off contribution for energy costs; postpone zero; meanwhile open up gas, coal, nuclear and stick to your guns; pull the plug on 5 plus million benefit recipients; call a GB wide referendum on whether the Union should continue for the next 100 years.
True, the Bank of England can buy all the gilts issued on behalf of the Government as well as all the gilts sold by their current holders. The consequence however would be the collapse of sterling leading to higher inflation and if rates are not raised then to a vicious circle of currency depreciation and high inflation. The reason why sterling is recognised as an investment currency and included in various investment indices is because sterling was the world’s reserve currency before WWII. That is now a long time ago.
“it’s hard to see how Sunak could ever succeed given the constraints that he has, to a large degree, imposed upon himself”
Has no politician ever taken one position before getting into power and then proceeded to do the opposite once in power?
I don’t think the description of QE is complete, and so leads to a misunderstanding over the effect on inflation. In QE, the BoE creates money and gives it the government in exchange for bonds which it then sits on (until it wants to try QT). The government spends the created money. Hence QE expands the money supply (feeding inflation) through the government’s use of the created money – and the fact that the BoE then sits on the bonds is irrelevant. Even if the bonds were never repaid the inflationary effect would still exist.
I am still not clear how the money tree works and when it is in bloom. The article didn’t make it clear at all (and I think it was wrong on this), but your comment didn’t help me either, I am afraid. 😉
“The populist window that had opened with Johnson and Corbyn has now been firmly closed. But as Sunak could soon find out, it won’t stay shut forever.”
Rishi Sunak needs to make himself a populist choice by keeping the populous warm, well fed and protecting their property from the gobbling banks and corporations
We also need to cut the excess fat out of Whitehall (cut the waste) and the NHS (cut the plethora of managers).
We also need some austerity in government – no more vanity projects – no more woke or green nonsense and – no more aid to Ukraine.
Agree with all you say except for Ukraine aid: if Russia succeeds in its objectives in Ukraine, it will cost us far more in the end.
”As a currency-issuing nation, Britain can never ‘run out of money’ or become insolvent on its public debt.”
You are, obviously, insane.
Fazi is a Marxist fantasist. You just need to use the commonsense test. It has slowly dawned on the (economic) Left that simply raising taxes or indeed sequestration of assets have their downsides, and the idea that ordinary people can be entirely shielded from tax rises is a fallacy, or more accurately, a lie. But nor is printing money for ever a solution, as we are now seeing. If someone starts to tell you about how he has invented a perpetual motion machine of some kind, be very sceptical!
Of course, alternatively, we can simply look at the historical record – if it were so easy to be popular and have to make no hard choices between where to spend / invest tax money, while everyone gets richer, wouldn’t it have been done somewhere by now?
Government has a role, even government investment, but just look at how slippery that word can be – ‘invest in people’ i.e. give them all a pay rise on the grounds of ‘fairness’ (and ‘being nice’) and not productivity. It is interesting how no socialist society that has ever existed entertained this for a second – production targets arbitrarily increased, and strikers were described as ‘saboteurs’ and ruthlessly dealt with.
Some of Fazi’s points might have more validity if we actually lived in a small classic liberal ‘night watchman’ state. But of course, with historically high levels of taxation and debt, and with a huge level of QE to be unwound, this is as far from the case as is possible to imagine. I find the whole obsession not only by Fazi but most of our political class, with quantity and not quality, depressing. We certainly need a much more competent state, but not a larger one. Let us learn from east Asia and countries like Singapore Taiwan and South Korea. Of course, any left of centre government trying to go down this road would rapidly have to confront the massed legions of public sector mediocrity, the NHS being the most obvious but not the only example.
90% of comments seem to be about how dreadful it is and if only Govt had done such and such we wouldn’t be here now. No shit sherlock.
Few though make practical suggestions beyond cuts to public services. Now it is true there is always some inefficiency to find – start perhaps with the MoD and its dreadful record on procurement, or maybe even in the NHS where the failure to train our own means we now pay a premium for agency staff. Even Gove now signalling the white elephant that is HS2 may go. Jeez had nobody heard of Zoom before it was signed off.
However there are limits on public spending cuts if one wants to maintain the fabric of society and perhaps even simple law and order. So we have to look at tax increases too – £50b from rises to 25%, 45% and 50% tax rate uplifts. Hardly a return to the early 70s. Honest conversation with the public and they are as ready as they ever to understand. There are some mitigations, supporting Ukraine and the costs incurred by Covid – people are decent and sensible if an adult conversation takes place. Uncap the Council tax too on high value properties. Let’s properly incentivise the housing market whilst giving Councils a chance to better fund social care. Windfall taxes obviously. VAT on private schools and end to Non-Dom status – good ones for Sunak if he’s proper serious about fairness and the vulnerable. These are just some ideas and we know we should shift some tax from income to wealth, so let’s use the current situation to drive that.
And finally, Brexit cost us a small fortune in growth and tax revenues, and if we don’t do something different it’ll carry on wiping out dividend from many other things we might do. So let’s find a way back, with some caveats of course but a change in the dynamic we’ve been following urgently now needed. We’d get an immediate positive bounce in business confidence.
All is not doom. It’s about choices.
I suspect you are hugely underestimating the extent to which the State is inefficient and could be reformed to be both cheaper and more effective. It is obvious that for many years the State has possessed an overriding mission to expand purely for the sake of it, and that the existing public sector regards the rest of the economy and society merely as its life support system.
It’s only a guess on my part, but I would say it’s possible to cut at least £100bn off the total cost of government and still end up with a more effective set of public services. The fact is that layers upon layers of bureaucracy aren’t just costing the rest of us in higher taxes, they are actively impending the rate and quality of delivery at the front line. There’s no need to fire any nurses, firemen and soldiers or indeed to keep them at suppressed rates of pay. What the the public sector needs is a ruthless dose of the sort of disciplines that the private sector regards as essential for survival, and it would quite certainly be experienced by the general public as a sudden improvement in quality of service.
If there was some way to persuade Michael O’Leary to leave Ryanair and run the NHS instead, I’d guess that he’d sort it out inside three years. It would put about 200,000 people out of jobs of course and would be regarded as criminal by the public sector itself, but that isn’t the point. The existing system kills thousands of people per year simply through the way it imposes triage upon those who need its services. There’s no defence against the argument for ruthless reform that puts the producer interest where it belongs: back below that of the consumer and taxpayer. Right now, the NHS serves itself, and if that’s not criminal – morally, at least – I don’t know what is.