In the inverted world of mainstream media, the verdict is in. Liz Truss and her merry men of “morons” (as the FT has nicely termed them) have destroyed Britain. They did the deed by killing off the pound and the gilt market with a tax cut. And, of course: Brexit.
Even Michel Barnier confirms it. “Not all of these difficulties are due to Brexit, I am simply convinced that Brexit makes everything more difficult,” he tweeted.
Unfortunately for Mr Barnier and co., the idea that Brexit, Liz Truss and the mini-budget had anything concrete to do with the bond crash and related economic shambles is laughable. Of course, they got things wrong: the comms strategy and reluctance to consult the OBR ahead of the mini-budget release was dim-witted. But their communications failures were no worse than those of the Governor of the Bank of England Andrew Bailey, who told the public they were facing Armageddon and should not ask for pay rises.
So who or what is really to blame?
A place to start would be with lockdown, not Brexit, as the source of today’s UK troubles. This was the first emergency that brought uncosted commitments onto government balance sheets in conjunction with epic central bank support. ‘Spend now, cost later’ was the mantra of the day.
The next factor that turned an already pressing crisis into an even bigger one was the abject denial by most officials, commentators and central bankers over the course of 2020 and 2021 to admit any of this lockdown stuff might be inflationary. They insisted that this was a “transitory” supply-side driven thing. It would go away all on its own.
When natural gas prices started going up in the fourth quarter of 2021, we were told this had nothing to do with net-zero driven underinvestment in energy over the course of the last five years. It too would be resolved. And a gas-rich power with a vendetta would never dream of exploiting our vulnerability, either.
But then Russia invaded Ukraine. And Europe decided in unison to cut the continent off from Russian gas as a penalty — even if this amounted to using its own citizenry as a human shield in a war with Putin. Time and time again we were told this would be manageable. “The West” could handle the inflationary consequences. We would get through it. As for the markets and laissez-faire principles, well, meh.
When energy companies started going bankrupt, and customers started facing soaring bills, nobody seemed to mind about the huge cost of an open-ended energy cap and energy company guarantee scheme. None of that was a political problem. But a tax cut on the 45p rate of income tax — that was enough to break the camel’s back.
SocGen chief economist Albert Edwards is closer to the mark. He blames it on Andrew Bailey’s stubborn commitment to maintain a quantitative tightening path despite the economic headwinds the UK was facing. “Gilts were stable for a week before the budget as 90% of the measures were already factored in,” he noted in a tweet. “Gilts started their collapse the day BEFORE the budget as the BoE reaffirmed aggressive QT. We have no idea how much of the collapse was due to QT, LDI or the budget.”
He’s right. And that doesn’t even factor in the fact that the UK pound is a hard currency reserve asset. Unlike Ecuador or Russia or any other emerging state — indeed, even unlike every Eurozone country — the UK borrows in its own currency. This gives it options other countries do not have. Those who lend to Britain are supposed to understand that risk. Since they can’t do anything directly about it, if and when it looks like Britain is near going down the debasement route they engage in hysterics.
But Britain can ignore those hysterics for as long as it has other variables in the economy to attract the goods, services and commodities it needs when the pound takes a beating.
Thankfully, it has many such variables. Chief among them is its highly educated English-speaking population that a cheap pound will only make an increasing bargain to hire. It also has a second-to-none further education system. Culture. Energy. History. Tourism. Connections with the Commonwealth. Most important of all it has immense spare labour capacity (albeit with the right incentives and conditions) to make reshoring all the remaining stuff it needs conceivable and possible.
But it doesn’t even have to get to that — Britain has another trick up its sleeve. As a next step, it could stimulate domestic demand for any new bond issuance, which can be achieved through regulatory capture (i.e. forcing UK pension funds to hold an ever larger amount of gilts). It can also be done by stimulating domestic investment demand, say by issuing a special series of “Elizabeth bonds” directly to the public as Neil Collins has also wonderfully explained.
Unlike what the propagandists would have you think, Britain is not a basket case. Britain has real sovereignty. It just needs a steely leader to leverage that sovereignty in the interests of its own population. If it can restructure itself, it can generate all the growth it needs.
Izabella Kaminska is the former editor of FT Alphaville and founder of The Blind Spot.