I think we can all agree that Liz Truss has proved she can make unpopular decisions. Crashing the pound isn't going down well with anyone, and will increase inflation. Fuel prices will already probably increase by 5% or so, which will be 8p or more a litre. Food will also see seriously rising prices, soon.
But what else can Truss do to make herself unpopular to add to the already long list of tax crimes she has committed? My suggestion is that today the reality of rising interest rates will become clear. The interest rate on 10 year government bonds is now over 4.5%, a rate last seen at the time of the 2008 crash, and I suspect no one in the City thinks it will stop rising at that point. The decade or more long era of cheap money had gone, although it is worth noting that with inflation at more than 10% this is still a seriously negative rate of return.
That fact might be some comfort to the Treasury as the currency issuer. It will be none at all to the UK mortgage holder. Millions of people will be coming off their fixed-rate mortgage deals in the next year. Many of them will have been paying less than 2% on those deals. Five per cent or more may be the best offer they can get now: it looks as though the 4% mortgage disappeared yesterday. Within days I think the going rate will be 6% and it could easily exceed that for a while.
As I keep saying, this matters. For those who recall the 80s and 90s and the wildly fluctuating mortgage rates of that era, which we survived, this is not the same. That is because most mortgages then were for multiples of 3 or so times income. Now they are for multiples of six or more times income. The leveraged impact of mortgage rate increases on household disposable spending power is much greater as a result. And so too in consequence are the absolute rate increases that are going to be demanded.
I have kept playing with the data on this. If I use a £200,000 mortgage, and they are commonplace, then depending on mortgage term and type of mortgage the increases vary, but it's easy to come up with mortgage payments increasing by £500 to £600 a month, or between £6,000 and over £7,000 a year.
The point here is fourfold. Many who now have mortgages have never suffered a significant mortgage rate increase. They do not understand what is about to hit them, and have never budgeted for it.
Second, this means margins for error in these households' finances are minimal.
Third, these increases are going to make the energy price increases look insignificant in the grand scheme of things. Households will simply not be able to pay. Even moving to interest-only options will not save many, and will only defer the pain.
Fourth, rents move in line with mortgage rates as many smaller landlords have heavily mortgaged properties. This pain is going to be transmitted into the rental market very soon.
In that case there is nothing to be relaxed about today. There is only the risk of massive recession coupled with high unemployment as businesses fail, serious homelessness and social chaos to be looked at in all this.
Truss has got almost everything about her economics spectacularly wrong, but that is no reason to gloat. The cost of this will be very uncomfortably high. I wish it were otherwise.
And I wish Labour began talking about the crisis we're in instead of carrying on as if nothing has changed when so much has.
We deserve politicians who understand the scale of the issues we are facing. So far we are not getting them.
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Agreed.
Every time a member of this particular Tory Government breathes – it’s a bad decision as far as I am concerned. I’ve never seen anything like it- so cavalier.
They’re just going to move money around – they’ll be no real growth no matter what they say – money already made will already have been moved into the coffers of the sort of people Jolyon was talking about earlier this week.
How the hell can you stand there, looking at the rich getting richer and everyone else worse off and say that you are doing a good job and ignore the distribution element?
OK – it’s only money, but there seems to be no intellectual curiosity about what the redistribution upwards actually means in the real world!!
What it is, is white collar daylight robbery. In plain sight. It’s criminal. Hopefully the penny is dropping with the public and we are seeing the last days of this financial charade we’ve been living with for far too long.
Wes Streeting this morning illustrates your last point. Just parroting Reeves ‘we are now the party of sound money’, and backed into a corner by Martha Carney ‘but how will you pay for it?’, ‘ where is the money coming from?’ . No attempt to push back on ‘where money comes from’ and what the options are – including QE, etc, pensions, savings etc.
Nothing much about what they will actually do with the money – rebuilding NHS, Green New Deal which they now seem to have adopted etc.
And they never challenge, – and nor will Starmer today – the false narrative that Labour have always been profligate vs ‘responsbile’ Conservatives , indeed he will embrace that narrative and say ‘now we have changed’.
Despair.
Agreed
Unfortunately, I will have to hold my nose and vote Labour at the next general election as that is currently the only way in order to remove the incumbent Tory nodding dog.
Craig
But better that Labour do not make inflated and unfulfillable promises. Disillusion and disappointment would be the product of reckless lures for votes: hopefully, Labour will win without offering the moon, then faced with the reality of government of a half wrecked country, they can demonstrate sound government that ensures a fairness for all.
Not with a commitment to a balanced budget they won’t
It seems to me that Liz T has created worsening “affordability compression” – what households are left with, after paying for necessities, is subject to relentless contraction.
On the one hand, they will spend less on discretionaries, which is bad news for anyone working, or invested, in sectors supplying non-essential products and services to households. People can no longer prop up their discretionary spending by using cheap debt, because it’s no longer cheap.
On the other, the affordability of existing mortgages – let alone new ones – will come under ever worsening pressure. Property prices will fall, collateral will be undermined, and borrower confidence (based on home equity) will implode.
Did those well-heeled (at least on paper) Tories who elected Mizz Liz realize that they were voting for lower property prices? I’d guess not.
Well Tim, I’m afraid I feel more than a touch of Schadenfreude concerning those tory party members who voted for Truss as PM. So what if their over valued properties now fall in value because their idiotic idol has wreaked havoc in the economy?
Serves ’em right. I have sympathy for everyone else suffering as a result of her dogmatic idiocy, but not them.
Thank you, Richard.
I have come to the conclusion that this is the Tory plan. As long as prices are high, people have to work harder. If houses are expensive, people strive to get a home. If benefits and social housing are stigmatised this accelerates the drive for something better. This works as long as the gap between striving and the ability to achieve does not become too wide. I don’t think that the economy that is being kick started, it’s us.
You may be right
Sarah I think you are right. It’s a moral narrative. It’s Truss leveraging her background in order to ‘fit in’ with the powerful and moneyed set – hence the ferocity with which she pursues it, and the underlying insecurities it betrays.
‘Soft power’ is so interesting… when one dissects moral narratives they function and scale as an algorithm
You are describing political economy
Am I unduly cynical is suspecting that the crashing of the pound has gone down rather well – with immensely rich characters who may have been shorting it?
This is something I’ve been thinking about too. Confess I’m too naive to understand currency markets, but it wouldn’t surprise me if someone has benefitted massively from all of this.
Bankers and hedge funds have
Kwarteng old employer Odey has made/is making a fortune
I think we are now seeing what happens when a government moves away from the herd and decides to start overtly printing money for their pet project rather than continuing to pretend that they need to attempt some sort of vague balancing act.
It was pretty obvious that the government was printing money during Covid-19, but that was different because all the major economies were doing it. We had a similar situation during the financial crisis. The markets will ignore money printing when everybody else is doing the same thing.
I have never doubted that governments can print money because these are fiat currencies, but the pretence that you are trying to balance the books is necessary to keep markets vaguely calm, even if a government can borrow unlimited amounts from its own bank.
The problem here is the blatant way in which this has been done. Minds are now focused on what is happening and Sterling, which has been on the slide for years, has been devalued further.
This is simply not true
Of course the government can print money
But it also has to tax appropriately
And spend the money well
The last were what was missing
Let’s put some politics back into the discussion about economics, the talk about QE vs. Interest rate rises is at heart technocratic.
What Truss and Kwarteng have unleashed is ideological and has been met with disbelief in the markets. Richard sums up how bad it might get for house buyers and renters. The TU movement is already embarking on the Enough is Enough campaign and it’s getting packed meetings.
The gap between rich and poor continues to widen, but we continue to think making as big a profit as possible is the overarching goal rather than the by product of doing business. This itself is a complex mix of culture and history. Britain industrialised first – people it seems used to wealth to joined the establishment and didn’t keep reinvesting . In the 1980’s I read of machine tool castings with 1880 stamps on them. Britain got a free ride from the economic imperialism that replaced actual imperialism (unfair terms of trade and exploitive supply chains). It goes on with competition based on cost not quality and widespread rentier behaviour. How bad it is can be seen by £1 tee shirts, the sheer scale of in work benefits and the capital employed behind each worker (ours is persistently low).
Relatively we were slipping by the end
of the c19, but we truly got bankrupted by WWII even as we mythologise it. Without supporting totalitarianism I observe that The Cold War moderated Capitalism (at least in its home markets). It had to be on its best behaviour; if you doubt this look back on the so called kitchen debates between Regan and Khrushchev in 1959. When it all fell in heap (as it deserved to) in 1989-91 two thing happened, the brakes came off and any alternative was sidelined (remember TINA). All the time this was going on others were catching up (as they should) and power was migrating from the nation state into multinationals and financial markets – placed where national government cannot reach. For a lot of this we had the shelter of North Sea oil and EU membership – both have now gone. To anyone who was looking 2008 showed the empower has no clothes.
I conclude we are in a long term cultural and structural decline and about to hit the buffers and I haven’t even touched on the climate crisis in this summary.
According to reports from its Conference New Labour is back and its is going to major on skills development and traditional economic management – a partnership with business. I mean c’mon what are you thinking.
Food price inflation’s already here. The turkey crowns I buy from Hixson were £45 in July. They’re £80 now.
While I understand, and share, the despair over Labour’s economic illiteracy, I think that those of us who do are a very small proportion of the electorate. Most voters I encounter are completely uninterested in ‘economics’ and are wedded to the belief that taxation funds spending and that the national economy can be run like a household budget. Attempts to disabuse them of this are mostly met with disbelief and even hostility. This won’t change significantly in the wo years or fewer that we have before the next General Election. I can’t see much electoral mileage in Labour trying to change these beliefs.
On the other hand, I see a great many voters horrified and very anxious about the cost of living crisis as it affects them personally, and horrified by the falling pound and increased interest rates. They do understand the implications of this. We have to recognise that these are the voters Labour is speaking to and seem to be doing a reasonably good job at it.
I don’t think Labour should waste time fighting the battle over the GFC and its consequences. The message that ‘we have changed’, though irritating, will, I think be more effective than trying to fight the also well entrenched belief that Labour is profligate with the public finances.
I’m not enchanted with Starmer’s message that Labour is a centrist party now, but once again, my experience of the voters who aren’t that interested in politics (which is most of then) says that they are most comfortable with ‘centrism’. And the Overton Window has moved so far to the right that centrism can well be viewed as the old ‘left’.
What the consequences of a Labour victory in a GE would be is anybody’s guess. I stick firmly to my belief that once a party is in government the populace doesn’t much care what it does, so Labour ‘could’ be more radical so long as they don’t adversely affect people’s pockets and livelihood.
I know this will be an unpopular view on here,; I don’t much like it myself, but I don’t see who else has any chance of playing a major role in wiping out this terrible government at the polls.
P.S If I didn’t largely agree with what you say, and am grateful to you for educating me in the truth behind state finances, I wouldn’t make this blog one of my first reads every morning. Both for your analyses and the quality of the comments.
Thanks
” And the Overton Window has moved so far to the right that centrism can well be viewed as the old ‘left’”
Surely current centrism is the old right!
Yes – I am trying to decide what to do and wondering, given the dire straits we are in and the desperate need for a change of government, if voting Labour and offering to help get the vote out is all we are left with. Keir Starmer’s silence – when he should have been on his feet protesting loudly about the Tories’ dismantling of democratic legislation and his apparent aims and intentions fall far short of what I was hoping for. I’ve tried to put myself in his place – at the sharp end – with the hopes of millions depending on his winning the next election. Are we seeing extreme caution – making sure to do or say nothing to provoke a press character assassination? I don’t know if he is a man with a mission or a diluted Tory who wants to be in power. But given that, in this case, choice is limited and we can only work with what we actually have, I think I will opt to hope for the best and to think that, for now, this is as good as it gets.
Thanks Maggie, an interesting and (sadly) probably correct analysis of our politics. Whilst there were things to approve of in Starmer’s speech like the creation of a state energy company (shame about the flag shagging name) and his attacks on this ghastly government, the refusal to even contemplate electoral alliances with other parties, and the commitment to ‘sound’ money were depressing.
“What the consequences of a Labour victory in a GE would be is anybody’s guess. I stick firmly to my belief that once a party is in government the populace doesn’t much care what it does, so Labour ‘could’ be more radical so long as they don’t adversely affect people’s pockets and livelihood.”
I’d love to see labour be more radical if they gain power than appears likely. Matbe a lot of the electorate are so unwilling or unable to interest themselves in political economy that the only way to get decent policies through is to get elected on the coat tails of bland sound money centrism and then quietly enact radical policies for the general good of the population in the background.
Discounting for a minute the possibility that Truss and Kwarteng are completely insane, the next most likely conclusion is that they are determined to Americanise the UK economy in one foul swoop, and dont care what colateral damage is done in the process.
Taking this as the working assumption, what is step 2 of their plan, and why are they not willing to reveal how they will balance their books till November? We already know that cutting public expenditure to pay off the debts they are now incurring is impossible, so what else could they be planning?
My scary version is this. NHS running costs are around £176B pa. Lets assume a typical profit margin in US healthcare if around 10% gives £18B potential profit pa. Then using P/E ratio of 14 implies NHS could be sold off to American investors for at least £250B and probably a lot higher, paying off a big lump of UK public debt in the process.
The ERG know they will never get an 80 seat Conservative majority ever again (which was just a fluke of Boris and Brexit) so this is their only chance to do anything that radical. If they loose the next election, so what? They will have permanently changed UK society in ways that are irreversible.
Could not be done in two years, I suggest
I got a letter from the Labour party this morning demanding £30, quite frankly given their performance over the last decade I wouldn’t pay them in washers. They seem to be approaching opposition like a sofisticated simulation, going through all the theoretical moves without actually engaging with the desperate results of year of political abuse. I’m sure that one element of this is to let the government sink itself but having to sidestep the bodies it leaves along the way.
Eventually some of those increased housing costs will end up on the doorstep of Universal Credit/housing benefit. What on earth will the government do then to limit its exposure?
perhaps these are the last throes of the 40 year old neo-liberal cycle
& at the moment I would even welcome a return of a Blair/Brown Labour Govt
& Im a Corbyn supporter
As Half Man Half Biscuit sang ” The light at the end of the tunnel — is another train coming towards you ”
but surely the Tories cant get any worse ? —just the 99% of us left picking up the pieces
Well, it looks like Starmer feels it is safe to go full on Blairite now.
Keir Starmer speech: Labour leader to quote Tony Blair in pitch for power
https://www.bbc.co.uk/news/uk-politics-63037696?at_medium=RSS&at_campaign=KARANGA
It makes me wonder if the removal of bankers bonus’s was a not-so-subtle way of “I’ll scratch your back if you scratch mine.”.
Re the housing market it is worth having a look at the share price of some of the UK’s leading house builders. On paper they still seem to be doing well, but it looks like the market is pricing in something bad and has been for the last two years.
Barrett Developments Jan 2020 share price high 888p, today 378p.
Persimmon Jan 2020 share price high 3300p, today 1240p.
Taylor Wimpey Early 2020 share price 237p, today 94p. Go back to 2007 and the share price was over £4.
The share prices of house builders have already crashed, investors in them have lost big time. How much longer can house prices defy economic gravity? I think one way or another we will now pay the price of the mistaken belief that house price inflation was a one way ticket. That house prices going up 10%+ a year in a supposedly low inflation economy was always a recipe for long term economic disaster. It will be interesting to see what the Tories do next to keep it all propped up. My guess is 50-100 year mortgages.
50-year mortgages are already available – the literal grip of death that the word means
One of the more bizarre aspects of the present situation is the BBC’s entirely evidence free constant repetition of Right-wing propaganda that “The Tories have always been the party of Economic competence”.
When exactly did this golden age occur?
1970-74 Ted Heath crashed the British economy and as a result we had power cuts and the three-day week.
1979-1997 Thatcher and Major. The two biggest recessions since the 1930s sandwiching Nigel Lawson’s “dash for growth” that actually caused the second recession.
Thatcher’s pig-headed ignorance also destroyed most of the British manufacturing industry that had been built up over 200 years and completely wasted the one-off bonanza of North Sea Oil.
2010-2015 Cameron and Osborne. Austerity. A policy so dishonest, unnecessary and stupid that the country voted for Brexit.
2016-2022 May, Johnson and Truss. Chaos. Incompetence. Lies. Nothing works.
What on earth does the BBC think it is doing?
I wish I knew…..
But why does Labour keep accepting this narrative and not pushing back – that Labour in government have been more economically competent that Tories. Instead Starmer will accept it and say weve now changed.
” A policy so dishonest, unnecessary and stupid that the country voted for Brexit.”
And there it is; they voted for the dishonest, unnecessary and stupid. What is anyone supposed to do with that? Who is to say they will not do it again?
I make no claim for the superior wisdom of Scotland; but they certainly didn’t vote for the dishonest, unnecessary and stupid on this monumental scale, time after time; or voted for Brexit. They were promised voting against Scotland’s independence in 2014 was the only guarantee of EU membership. Labour endorsed the promise in ‘Better Together’. That went well.
Bottom line? We simply can’t trust Britain; with promises we know not only they will not keep, but they know we know they will not keep – and they make the promise anyway: or trust them not to tank the currency, or bury the economy, or blow the North Sea Oil bonanza (with little return for Scotland outside Aberdeen); and destroy the aspirations of yet another generation of Scots; endlessly to be disappointed over the last forty years.
The die is cast in England: Brexit it is, now and forever, no matter what. Starmer has sealed the deal. So be it. The audience he chose to speak to in Liverpool calculatedly excluded a Scottish audience; that notably has largely chosen SNP over Labour for fourteen years. Does he think nobody in Scotland will notice? He knows perfectly well, and does it anyway. Appealing to Unionism is one thing; obliging Scots to endorse it is quite another (if you have a case, make it). So be it.
Voting for independence is nothing to do with Nationalism, but much more important – the rejection of unnecessary stupidity and dishonesty. “Britain” is a lost cause.
Well, at least truss is making the tories unelectable for the foreseeable future. That’s about the only positive thing I can say about her tenure so far.
I don’t think a lot of older people appreciate the scale of the mortgage issue here, I’m glad you explained it so well.
Even those who are lucky enough to have inherited money have pushed prices up further, because they’ve then been able to take a large mortgage on top of a large deposit, and just buy a bigger house than they would otherwise have been able to afford.
This is an issue all across society, in every income bracket and location. It’s the culmination of deliberately inflating asset prices and holding down wages for decades.
I’m waiting in hope that others in the government and Bank of England realise it before they make everything 10 times worse, but I’m not holding my breath.
Twitter is full of “well they shouldn’t have borrowed so much” commentators. I guess trolls, or people old enough to have had some other choice.