January 9, 2025 - 4:00pm
Don’t make promises you can’t keep. Worse, when it becomes apparent you can’t keep them, don’t double down on them because nobody will believe you.
Someone should have given Chancellor Rachel Reeves that advice during the election campaign last year, when she promised to repair public services, restore economic growth and balance the books. This, impressively, all without raising income taxes, national insurance or value-added tax, thereby ruling out the bulk of the country’s revenue-raising sources. Anyone doing the maths could tell it was, to say the least, optimistic. It was safe to assume that she would have to drop at least one of those pledges after the election, the most likely candidate being the commitment not to raise taxes.
But she stuck to her guns. So to meet the funding goals of her other ambitions, she delivered a budget that leaned heavily on business taxes, with a predictable impact on investment. Businesses now report they plan to meet their added expenses by cutting jobs, reducing wages and raising prices. The first two measures will slow the economy, the third will raise inflation, possibly giving us the dreaded combination of stagflation.
The international backdrop is further complicating her task. With the world awash in debt since the pandemic, investors are demanding a higher return for the money they lend to governments, driving up interest rates on long-term instruments. The main driver of this trend is the US, whose huge deficit shows no sign of abating. As investors drive down prices on US bonds, which raises their yield — effectively, their interest rate — the effect spreads globally. Since the dollar is the global reserve currency, everyone is willing to park their money in US Treasury paper, which means money is flowing stateside from all over the world, and thus leaving other countries.
Britain is just one of many victims of this American flight. But unlike other countries, whose interest rates are getting dragged higher by US bonds, Britain is now pulling away from the pack. UK gilts pay, by some distance, the highest interest rate of any G7 country, and the gap has been widening. In part this is due to the persistently higher rate of inflation in the UK. However, there are signs that investors are losing faith in the government’s fiscal strategy, and thus demanding a premium on the money they lend to it.
While not as rapid an increase in interest rates as was seen during the Liz Truss episode, when gilts leapt by over a percent in just a few weeks, the scale is worse, with interest rates now at levels last seen at the time of the 2008 financial crisis. The danger for Reeves is that she may now have trapped herself in a self-reinforcing downward spiral. As interest rates rise, government debt payments go up. That reduces the money available for other programmes. If the government won’t raise taxes, it must therefore cut spending. That in turn, risks slowing the economy, and with that, tax revenues. If tax revenues go down, so too must spending. And on the cycle might go.
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SubscribeBring her chancellorship into question? Plenty of people predicted this would happen after her budget. It’s GCSE stuff – raise taxes and hand money to the public sector. How on God’s Earth will that create growth? The government’s no. 1 priority, apparently.
Add to that the outright lies she’s told everyone about her employment history, and qualifications, and I think most of us are well past bringing her chancellorship into question.
Plenty of people predicted this would happen after her budget.
It was pretty clear long before that.
Hopefully Mr Bond will terminate her reign.
All this – literally all of it – is straight out of the Labour playbook since at least the 1960s.
The recent election included the votes of many who won’t remember (or choose not to bother finding out about) those times, especially the denouement in the late 1970s. To those of us who do, none of this economic illiteracy comes as any surprise whatsoever.
The pace of life has changed since 50/60 years ago, hence the more rapid downward spiral once these dumb-ass statist policies are introduced. There is simply no way back for Reeves or her utterly incompetent boss.
It’s way too early to blame Labour for the entire mess. What they are currently failing to do is effect the rescue they promised. But the ship was already letting in water before they came to power.
Im sceptical of them effecting such a rescue. I think they simply aren’t radical enough. But after months in power they don’t shoulder the whole blame. They were naive of course in thinking (or at least saying) that growth would come easy and solve the countries problems by itself.
Why is it too early? They lied, no one felt growth could come easily except the financially naive and they should not be allowed to be Exchequer. Squandering money on the public sector while squeezing businesses was a clear recipe for disaster – I can’t believe they’re so stupid they didn’t see it. Truss and Kwarteng were forced to resign very quickly and this current administration led the yapping for that to happen.
Because it needs to become clear that easy solutions won’t work before something more radical is attempted. Such radical solutions would have met with a lot of resistance from those Labour voters who have been riding the gravy train for the last decades.
To be honest I doubt they have the guts for that. What I think we’ll see is the rich getting richer while the country taken as a whole falls apart. More of the same in other words.
It was a proud day when I finally grasped the easentials of bonds and the inverse relationship of cost to buy and interest rate etc. A stretch for a Fine Art BA Hons
Just don’t ask me too many questions …and I can’t remember now which bit is called the coupon…
However, I owe it all to MikeMaloney, Alasdair Macleod, Peter Schiff and Egon. Thanks guys x
Well done – i started the journey about 5 years ago. You’ve got a list of gold bugs there. In case it helps people I now follow include Luc Gromen (macro), Mike Green (passive flows). Jeff Gundlach (bonds), Michael Howell (liquidity), and Russell.Napier (financial repression). I often have to listen at 0.75 but I get there in the end!!
Why did someone who started out as a trainee BOE economist and then wound up working in a call centre become Chancellor? How did a man who, by his own admission, failed so badly as DPP, wind up as Prime Minister? How did David Lammy become Foreign Secretary? How did a defence minister whose uselessness was so extreme that her troops had to exercise with broom handles in place of guns become President of the EU? How did a mediocre and corrupt hack who was quite clearly senile become President of the US?
Does anyone else have the suspicion that we have a problem with leadership selection?
We have a problem with the social classes from which they are drawn.
You’ve left Trump out of the list, surely?
The bond market vigilantes are merely limbering up on this. If you pitch yourself against the bond market there is only ever one winner.
The term vigilante minimises the role Reeves has played. It suggests bad actors are deliberately hurting the UK.
Whereas the truth is the UK relies on foreigners to buy UK debt. Each month the UK must auction off tens of billions of debt to fund living beyond our means. Many foreign debt buyers are rightly shying away from the UK because we look like a terrible prospect and so all sterling assets look less attractive. With fewer foreign bidders for our debt, the auction price of gilts is falling, so the effective interest rate is rising.
This isn’t vigilantism. It’s investors looking for better, safer prospects.
Surely foreigners should not discriminate. It is not equity is it? They should take into account that we have been brought up with rotten economic policies and seek to give us a leg up. We haven’t had a role model like Musk to aspire to. It’s just not fair! Those rotten vigilantes!
More than 60% of the UK workforce is now employed in small business. If you genuinely wanted growth you would cut taxes and regulation for these enterprises and provide other incentives to risk takers such as government backed loan schemes. You would pay for it by recovering some of the $6-8 trillion that has gone into the housing market thanks to the incompetence of your predecessors since Gordon Brown. This can be done by reducing the central government subvention to local authorities ( at least in the South East) and requiring them to make up the difference by raising Council Tax rates on the larger and more valuable properties – which would have the added benefit of taking some of the heat out of the housing market.
In this way you could begin the slow re-building of an enterprise culture in the UK. Obviously you’d have to fix the education system as well – and not by destroying good schools and forcing everyone into the state sector.
You sure as hell wouldn’t pile more taxes on to productive people in order to bung yet more bunce to your clients in the public sector. Why they thought they would be taken seriously after chucking £10bn at the train drivers is anybody’s guess.
Useless.
To the best of my knowledge this is incorrect or at least incomplete. During the pandemic deficits were increases but it is much more relevant to mention that central banks bought the debt on a mass scale. They injected the economy with trillions using “quantitative easing” and this is mostly what pushes down the interest rates on bonds/gilts. They also did this after 2008. Recently they have reversed that process a bit, however, most of the printed money is still in the economy, mostly stuck in assets causing massive asset inflation. It is responsible for unaffordable housing and – partly because of that – a huge increase in inequality. Nobody in power seems to care about that thought. It was only when a bit of inflation in the real economy occured that they raised interest rates.
In any case, the entire narrative that governments have to borrow from private investors is just not true. Governments and central banks create money and if anything they have pumped way too much in the asset economy and, compared to this, way too little in the real economy which causes rent seeking, inequality and stagnation.
It is responsible for unaffordable housing and – partly because of that – a huge increase in inequality.
A problem compounded by Gordon Brown’s decision to remove housing costs from the BOE’s interest rate determinations. Despite this, Labour’s gaslighting machine is so effective that there are still wage earners and rent payers that vote for the party that has systematically pauperised them.
Though it must still have been obvious to all succeeding governments what was happening. It’s not like they could fail to notice that house prices were out of control.
But who now would have the guts to tax all that unearned income? Or take any action that would bring house prices down to reasonable levels? This is the one way only gravy train and a lot of people have done very well out of it.
I’m not criticizing you here but all of the economists on mainstream media seem to think that this is simply a political choice between raising taxes or cutting spending as if both of these policies are equivalent. This is nonsense. She has to cut spending. If she raises taxes further then confidence will collapse.
Our welfare budget is unsurprisingly high but Labour will not dare to touch that. Even in opposition they nagged at any who suggested cuts or any way of limiting it.
Rather than incentivising work choosing not to has made more sense to far too many and cowardly government – step forward the Tories – kept the “easy” solution of bringing in unskilled workers as well as skilled to take up unpopular jobs. The fact that such immigrants often bring with them quite large families and end up relying on welfare didn’t seem to be factored in to any equation.
We’re.already in stagflation. Talk to any SME business owner.
A somewhat concerning direction is the Labour government, whilst actively antagonising the incoming US President and administration (Lammy as Foreign Secretary, Mandelson as putative Ambassador to the US, Labour activists campaigning for Harris in the US, etc,) are now ostentatiously cosying up to XI and the CCP.
Now I fully understand that geopolitics and pragmatism are necessary policy in this highly interdependent world but this appears to be a deliberate attempt to create an environment where Labour can say that “We can no longer rely on the US for our protection therefore we have no choice but to rejoin the EU titanic project.”