I posted this thread on Twitter this morning:
The shape of Trussonomics is becoming clearer. Assuming she survives in office, which given how unpopular she already is with her own MPs might be an optimistic forecast, what is the future going to hold, and what might it mean for the 99% of use who aren't bankers? A thread…
Unless you work for a far-right think tank there is now near universal agreement that Kwasi Kwarteng presented the all-time worst budget in living memory last week, and maybe way beyond that.
Let's forget the details (except all those tax rises for the rich and bigger bonuses for bankers) and summarise what he got wrong from the macroeconomic (big issue) perspective.
What he said was that he would run the already forecast deficit for the next year, of about £75 billion. Then he said he would spend £60 billion every six months to support households and businesses with the energy crisis, without explaining where the numbers came from.
On top of that, he said that they would give tax cuts of at least £45 billion which will add to the deficit in the next year.
And we should remember that the day before he spoke the Bank of England had also said that it wants to sell £80 billion of the government bonds that it holds back to the financial markets in the next year.
In all then, Kwarteng and the Bank (who, whatever they might say, seemed not to talk to each other about these plans) want more than £300 billion from financial markets in the next year.
To compound this, the Bank did not say where interest rates were going whilst Kwarteng merrily suggested balancing government budgets no longer matters when for the last twelve years his own party has said that is all economics is about.
Bizarrely, both Kwarteng and his party were wrong. That is because the relationships between money creation, spending, what the government calls debt and QE is a complicated one that it's very clear neither understand.
But what you can't do is tell markets not to worry when you are planning to ask them for vastly more money in the next year than any other government in history when your predecessors have all said it would be a disaster to do such a thing.
Kwarteng was like the new school teacher who tells their pupils running across roads without looking is just fine when every previous one disagreed. Of course the parents would be spooked. And so were markets. Confusion reigned.
Markets don't like confusion (unless you're a hedge fund manager, when you love it) and so the mainstream market decided to dump everything to do with the UK, whether it was sterling deposits or government bonds, as fast as they could.
Rationally no one could blame them for doing that. When it looks like someone incompetent is in charge why trust your finances to them? And, Kwarteng looks to be the most incompetent Chancellor the Tories have ever found, and they have got a lot of challengers for the title.
So, where are we now? First, the pound has collapsed, and the only reason was Kwarteng. Sure, the dollar is overvalued, but it is against all currencies, and the pound has fallen against everything else as well, so this is a particular UK problem with only one explanation.
In response, Liz Truss apparently wanted to say nothing at all. That is fine if you are a dictator who does not care about the consequences of your actions. Kwarteng was eventually allowed to say something. It was that he will have an announcement to make in eight weeks' time.
As reassurance to febrile markets goes, that was worse than useless and only reinforced the lack of trust traders around the world already felt in a man so clearly out of his depth. But what it did do was turn the whole focus onto the Bank of England.
We now know from the Governor and Chief Economist of the Bank that it will take whatever steps are necessary to control inflation (bar sacking Truss and rejoining the EU, which are needed but which they can't deliver). What they mean is that we will get interest rate rises.
These will also not happen before November, but unlike Kwarteng the markets still trust the Bank, so for now they have assumed that these rate rises will happen, and are happy.
How big will those increases be? Markets are pricing base rates at around 6% now. At present they are 2.25%. So, at a minimum the rate increase in November is 2%, and it is likely to then go up again at following meetings by maybe 1% a time until the 6% rate is hit early in 2023.
What's the impact? The pound may fall no further. Even so, the fall we've seen might wipe out many of the gains on inflation that the energy price cap was meant to protect us from.
A fall in the value of the pound impacts everything we buy from abroad. That includes gas, petrol and more than half our food. It also includes all that manufactured stuff we get from China and a lot of raw materials. Inflation is bound to rise, even if the pound holds now.
Kwarteng has in that case destroyed attempts to keep inflation under control.
But worse, increasing interest rates feeds through to higher mortgage rates. If base rates rise by 6% or thereabouts in a year so do mortgage rates, and very few families in the UK will be able to afford mortgages at 7.5% or more that they are likely to be offered very soon.
Unambiguously we have a housing crisis coming, and no one is talking about it.
And let's be clear, there is no obvious answer unless the government stops borrowing, which would reduce the pressure for increasing rates considerably.
There are two ways for the government to stop borrowing. One would be to slash public services. The other is quantitative easing. Let me address them in turn.
What we are hearing from the government and from the right-wing think tanks that clearly control it is that by November we will be told about the massive reforms to public services that they are planning. There are likely to be three elements to this.
One is straightforward cuts on the basis that it will be claimed that many services we have enjoyed for 75 years can no longer be afforded. That, of course, is not true. We could afford what we have always enjoyed, but 12 years of Tory government has destroyed these services.
Deliberate underfunding has now left these essential services so denuded of investment that the cost of restoring them is high, but not impossible, unless you really do not like state services. Truss and her gang hate state services. They have never disguised the fact.
So what I actually suspect will happen is that fees and charges will be introduced for many services. In that case charges to see GPs will happen. Expect schools to ask for payments for some lessons and supplies. Social care will be even harder to get.
And wherever possible there will be privatisation. So insurance-based health and social care systems will be proposed as a precursor to sale of state activities. The aim will be to reduce debt - and the current recklessness will be used as an excuse for the need for that.
The destruction of state services, from the NHS onwards, will be on the cards from November if Truss makes it that far. Indeed, this crisis might have been deliberately created to make this a possibility. There is no mandate for this, but democracy will not worry Truss, although it might her MPs.
What is the alternative? The deficit the government now plans could be alternatively funded. QE is one option. But given the scale of the crisis even that seems unwise and instead the Bank of England should simply lend the government the money to fund the deficit, interest-free.
At the same time, it should limit the interest paid on deposits held by commercial banks with the Bank of England to contain interest costs to the government.
Legally this is possible. Post-Brexit the government has no obligation to sell bonds to fund its deficit. And there is now no legal constraint on the government borrowing from its own bank, which can very easily create all the money required.
Will that add to inflation? I doubt it, and in any event that inflation would be better than mass unemployment and homelessness which is the alternative if interest rates rise as far as markets expect. Inflation is better than devastation.
And will the pound fall? Maybe, but not a lot, I suspect, when markets appreciate that this stabilises an economy on the brink of collapse, which is what they expect right now.
And would we need spending cuts in that case? I can see no reason for them, is my fair response.
But will markets react adversely? They might. But for all the reasons noted, I doubt it. They will realise that this is the ultimate backstop choice that has to be taken now to avoid calamity.
I can't see a lot else that is going to keep the economy from total collapse right now. I wish I could, but something this radical - and simple - is now required. Most things hang on it, in my opinion. Avoiding economic devastation is the task right now. This plan does that.
PS Apologies for the length. I don't just write these threads to explain what I think: I wrote them to work out what I think. That takes a bit of effort sometimes, hence how long they are.
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You say simple
could anything be simpler than a charge on the commercially-created credit money
?
and Eco-Fit with solar-warmed storage, just installed thru existing floors.. (micro-cellar and tank or “thermal bank” style Electric-powered (via PV) elements.
and
concentrating on the working poor in private-rented (often the worst)
housing associations could be given access to similar money – real money, where actually best directly-created, charged-for and invested, rather than spent?
hope that is help-full (see previous post)
thanks, Ian G
[markets, being Zero-Sum on Zero-sum money to a large extent might usefully be targeted?]
A very interesting article Richard.
I can see the logic in your thinking for the Tories future plans.
Oh what a tangled web they weave when first they practice to deceive!
Agree with your thoughts Richard.
Whilst the country can ill-afford another Tory leadership contest, Truss has demonstrated absolutely no leadership capability whatsoever and absolutely no grasp of economics. The sooner that Dumb and Dumber go, the better. Having said that, the Tories are so bereft of talent that I’m not sure there is any better option…astonishing that they now seem to think Sunak makes sense. For the record, he doesn’t. He is another neoliberal acolyte.
IMF studies on the 25 year run-up to the 2008 financial crash and the c.10 year run-up to the Great Depression showed an uncanny correlation in terms of the features that resulted in the crashes: large increases in the wealth and share of the wealth of the very rich; fast-growing financial sectors (and you might also want to include increasing deregulation); and, increased indebtedness in the population at large. Sound familiar?
Frustratingly, there are solutions – you touch on and suggest some above Richard – that simply require a sense of public duty, social awareness, rudimental economic knowledge and political will. None of these seem to be present in Truss or Kwarteng with the exception of a perverse political ideology that ignores the lessons from the past in the run-ups to the 2008 and the Great Depression. Their self-delusion, arrogance and sheer incompetence make me white hot with anger and frustration.
They seem utterly wedded to the concept – disproven in virtually every economy in the world – that to achieve economic growth, there needs to be an increase in inequality until it all seems to magically trickle-down and benefit everyone (Cameron’s austerity, etc.). Fantasy economics! I think it is best summed-up and illustrated by the arrogance and sheer detachment from reality expressed by the then vice-chair of Goldman Sachs, Lord Griffiths who justified the return to ridiculously high bonuses for his traders in the immediate aftermath of the 2008 crash “we have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all”. Makes you sick!
And, like a repeat of 2008 and the above quote, Odey must be happy with Kwarteng since, along with his support of Brexit, the Tory party and UKIP and shorting against them, he has benefitted enormously from their calamitous policies.
The Tories are (in)famous for their U-turns. They need one now as even the markets, the IMF and virtually every sane economist or business-person recognises the sheer lunacy of what they have proposed.
I have been reading you twitter comments for some time As a former Economics teacher I know my students would fully understand the conflict between this governments fiscal policy and the Bank of Englands monetary policy. Clearly the markets do! Therefore my question is why doesn’t the Chancellor or P.M. Do you really think they are clever enough to see this as the way to justify public service cuts? Surely it more a complete and absolute f…. up.
You have consistently presented clear solutions to the energy price crisis and cost of living crisis You suggest there are ways out of this financial crisis but do you think anybody in government or the conservative party are listening. Will anybody in the conservative party stick their heads above the parapet and call out the government, maybe Sunak?
I fear looking for salvation from the Tories is wrong
The problem is Labour is stuck in their rut of thinking
The impact of rising interest rates to quash inflation is to reduce demand in the economy. Cutting public services will put workers out of work at a time when the rest of the country is cutting back on spending making it harder for private companies to trade at the same levels they do now. They will reduce costs and the quickest way to do that is to cut employees. There will be large levels of unemployment. That I think is inevitable. Same thing happened in 1979 with the Tory hero Thatcher who had to quickly reverse the policy.
Agreed
And slashing public services would reduce the GDP, create some unemployment and add to state spending.
So it is QE and /or MMT.
QE right now
Definitely QE – money with no cost of production economy wise – or at least no cuts in the public sector which I think there will be unfortunately.
Whether its QE or borrowing, it trashes everything the Tories have ever said about so called ‘sound finances’.
The Tufton Street gang and their acolytes are sounding ever more ludicrous in their attempts at defence. Conversely Labour sound ever more sensible, though I recognise not as radical as some might like
Further to the above, to clarify
In one sentence: “£40k per home enveloping at 1 million homes and buildings a year could amount to £40bn into real works saving about £600m incrementally off the gas bills of the nation each year – IF ’20-year money’ could be implemented at 1.5% with the 1% to the commercial bank and the 0.5% slice allocated allocated as a Credit Creation Charge). Available o n application to local schools near the banks (or the school near the “loans” recipient). A bit like MMT.
A simple example, the £400 p.a to each bank for each time-limited screen-created “loan” would build the bank revenues per branch to about £240k extra each year for 20 years finishing at £4,800,000 p.a. From one extra employee.
£2,400,000 p.a. final amount similarly spread into green and public good
Equivalent savings off the gas bills near those branches from the local Eco-Fit £7.2m p.a. – the sum of the above figure. As green deal once said: cost equivalent to savings. So by only charging a total of 1.5% interest, a GreenER Deal.
A fitting tribute to have in place by the end of the Platinum year? By next year 300,000 jobs in full swing (at least) actually doing real work.
You say “Kwarteng presented the all-time worst budget in living memory last week, and maybe way beyond that” Probably true, though perhaps Churchill returning to the Gold Standard ws equally disatrous? And that is within the living meory fo a very few pople – just.
OK
But I don’t remember 1925
But it was bad, I agree
I was helping my son with his revision the other day and the question was: How close did Britain come to full democracy between 1835 and 1925? And it occurred to me that British history, on a national level at least, has been one long, bloody struggle by the common man to wrest rights from the rich and powerful, beginning with the right to freedom, to own land, to a wage, to vote, to the end of slavery, to the women’s vote, to universal education and healthcare, to social welfare, to human, civil, and consumer rights, to trade unions, to demonstrate, to the right to clean air and uncontaminated food, and at every step of the way, the rich and powerful have attempted to block those rights and maintain the status quo, and it’s taken spilt blood to wrest them from their hands, because they have rarely been given willingly. And now, in my opinion, in this country at least, we’re seeing many of those rights wrested back, and this government’s policies are quite possibly the acceleration of that process. And I have no idea what the answer is, but I do believe it’s about values, and that for any party to have any chance of reversing this trend, they need to start rallying people behind a set of values that enshrines people’s rights. Rant over.
Worthwhile rant
Absolutely agree with you Nick. These rights have been very hard won – a long struggle from at least the 1770’s. I think there has to be a mass movement in defence of them. Petitioning, journalism, blogs, marches, letters to MP’s – in particular to Labour MP’s – to remind them of their raison d’etre. A wider public awareness and public outrage is needed. I think Labour might be braver if it were evident that there was more of a will among the electorate to oppose the destruction of established rights. Perhaps to get a better Labour Party all of us who care have to shout up. A lot of people have got cynical about political parties and that has led to apathy. Plus many are so worn out with the struggle to keep a roof over their heads and pay their bills that it’s hard to find the energy to write to an MP. Also in the UK – particularly among older people there is a sense that it’s wrong to discuss politics – that you have to keep even voting intentions secret. I hope that more people will see that the onus for making politicians listen is with us all because politics and power is in so much that we experience and in the choices that we are presented with everyday.
In the same vein, one of my favourite books is Sen’s Development as Freedom. He argues that real freedom requires access to health, education, housing, income, security – much the same as Beveridge’s Evils.
Profoundly different to the freedom repeatedly talked about by these libertarian Tories. Their’s is the freedom for the rich and powerful to do whatever they wish, regardless of the consequences for society, the environment or economy. Under their values, only they have rights, with few if any obligations.