I am posting this thread on Twitter this morning:
We all know Truss has made a mess of her premiership, and will leave the UK in a parlous state. But what does that mean for the economy and whoever succeeds her both now and after a general election? A thread….
[Please note that this is a long thread. If it appears to stop mid-flow please click on the last Tweet you can see and the next section should appear.]
Let me ignore how we got in the mess we are in. Instead let me address the issues that we face. They are:
- Inflation
- Energy prices that remain out of control
- High, and still increasing interest rates
- Low pay rises
- Pressure on stretched government services
You could add in other issues, like ongoing war and the UK's crisis being exceptional to that in other counties. You could also mention Brexit, quite appropriately. Whatever is in the list, the issues look to be big.
That is the correct conclusion. So too was the reaction to Truss's mini-budget correct. Major tax cuts and regulatory reform were, at this moment, wholly inappropriate. Truss got just about everything wrong.
Leave that aside though. What are the consequences of the position we are in, because these have yet to all be seen, and so need to be explained. I stress, what I am suggesting is things are nowhere near as bad as yet as they are going to be.
First, high inflation rates compared to lower wage rate increases meant that households were always going to be facing an economic crisis this winter.
Apart from well focussed energy price interventions (and the one we are getting is poorly focused) there is little the government can do about energy price increases, excepting three things.
One of those is reform to the way energy is priced in the UK. The energy price cap being introduced is a poor way to achieve that goal, but better than nothing.
The second is to impose a bigger windfall tax. Nothing has yet been said about this, which is bizarre.
Third, the quickest to deliver and cheapest forms of alternative energy supply need to be focussed on: Truss has done the exact opposite by ignoring wind and solar and focussing on nuclear and gas. This was straightforwardly wrong by her and needs to change.
There is, then, ample opportunity for an improved energy policy for opponents or a successor to Truss to exploit. Having such a policy would massively help tackle the crisis we are in.
Inflation is a harder issue to tackle. The Bank of England is suggesting interest rate rises to tackle this. Their logic is that UK households have too much to spend and so interest rates must rise to crush their spending power.
The problem with this is it is not true. Households already have too little to spend in most cases, with that likely to get worse without any help from the Bank of England. The fundamental assumption that the BoE makes is wrong in that case.
The only other excuse the BoE has for raising rates is to match the US Fed and its rate increases. This is no argument though. The Fed is intent on crashing the US economy. Why copy it? Why not say a falling pound is a price worth paying in that case?
Tackling inflation is a task not within the reach of government except by energy price controls in that case. `That has to be admitted. In the current environment not everything can be controlled. Inflation might be the one to let go.
That makes sense when the alternative is a full blown mortgage crisis as a result of increasing interest rates when increasing those rates will have no impact on energy or food prices, which are set very largely outside the UK at present.
Let's turn to that mortgage crisis. As I have been saying for many months, and which others have now caught up with, the average likely increase is around £500 a month. Rent rises are also likely as landlords have mortgages.
This level of increase is unaffordable. Most households have nothing like that margin for error in their budgets. Whether they should have been allowed to borrow the sums they did in that case is now irrelevant. Excessive loans were permitted, and are commonplace.
This crisis has the capacity to make the energy price crisis look like small beer. People will be unable to pay, in their millions. That spills over into a homelessness crisis if they evicted, and into a house price crisis as they sell under pressure.
There will then be the negative equity trap to deal with, as people have mortgages bigger than the values of their homes. Those who lived through the early nineties know the personal tragedies this resulted in.
And we also have the makings of a banking crisis, potentially. I know banks are better capitalised now. And I know there are stress tests. I am not, however, wholly reassured by the reassurances of those who say all will be OK.
The debt crisis to come will hit households, intolerably. It will hit banks hard. Let's not pretend there will be no victims.
The answer to this is, of course, to stop the Bank of England imposing unnecessary interest rate increases. Sure, the pound will fall and inflation will stay higher for longer. But what is more important? Inflation or 5 million bankrupt households? Does the question need asking?
If the Bank does not agree then they should be told. My problem is I cannot see any Tory doing that, and right now Labour is saying nothing about it either. We may get these interest increases as a result. Mortgage rates of 7% may happen.
What then? Three likely things matter most. The first is that households will stop spending on anything but food, energy and mortgages or rents. There will be a massive fall in demand in the rest of the economy.
Second, as a result of that fall in demand whilst facing their own increased energy and interest costs many businesses will go bust and unemployment will increase, dramatically.
Third, government revenues will fall. Fewer people in work guarantees that. Spending more on energy food and mortgages and rent with almost no VAT due on any of them also guarantees that. So tax revenues will be hit, and benefit costs will increase, substantially.
The result of this is recession, plus a big government deficit at the same time. By the time this happens the measures the government can take are limited. They will have to keep people alive: beyond that their scope for action will be small. That will be how bad things will be.
This is the wholly predictable consequence of current actions. So what should be done?
First, stop interest rate rises. They are the easiest and quickest route to calamity, so they must be stopped. Yes, we will be out of step with all but Japan by doing this, but someone has to say recession is no way out of this crisis: it will only make it worse.
Second, do QE now to cover the cost of the energy crisis. This crisis is as serious as Covid: QE has to be used. That will take the immediate pressure off interest rates.
Third, accept inflation. And allow inflationary pay rises. They're not great. They are much better than millions out of work.
Fourth, reform energy policy.
Fifth, there must be tax increases to balance QE. These must come from the wealthiest alone. I have explained such a programme many times before.
Sixth, consider price controls. We already have them on energy and in some regulated sectors. They now need to be used to squeeze price of essentials. At present they tend to be heavily inflationary. That needs to be reversed.
Seventh, reconsider Bank of England independence. It makes no sense when the result is their current plan to crash the economy.
Eighth, seek international support for low-interest rates. They are essential. They will also save most developing countries from crisis. They can't afford their debts now.
Ninth, increase energy cooperation, worldwide. Sustainability will require it anyway.
Tenth, pray. In this situation we might all need to do so.
Will that work? Possibly. But what can be said with certainty is that this programme will deliver a lot more hope than the current route to Armageddon on which this government is set and which Labour is not opposing.
We cannot afford interest rate hikes. They must not happen. Recession, homelessness and domestic devastation are prices not worth paying for an anti-inflation policy that is itself doomed to failure. This is the biggest issue in economics now.
The trouble is that the Bank of England think they can do what they want right now after the debacles of the last few weeks. Somehow they have to be stopped. I just wish I knew who was going to do it.
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I think the biggest elephant in the room right now is UK housing. House prices, mortgages, IR increases and of course House price inflation. Tory Britain has lived a dream which could well turn into a nightmare. It has been part of fantasy land economics of UK PLC for far too long. The energy price crisis is small change by comparison.
The trouble is, 40 years of neglect around the real issue – affordability – is now about to bite us on the backside in the most horrendous way possible. Here is the reality. The fiction of ever higher house prices was held together by how it was sustainable as mortgage IR’s were low. Well that is now going to be blown out of the water. There was always the danger that an inflation shock to the system, responded to in the traditional way of increasing IR’s, would then result in mortgage rates going up to levels where people simply cannot afford to pay or buy. That is the crisis we are about to see. This could lead to the following.
1) The potential for massive defaults. Homeowners evicted.
2) BTL landlords defaulting. Massive tenant evictions.
What will be the Govt response. Knowing the Tories, they will try to prop everything up. I can imaging they might come up with a scheme to pay any mortgage increase where a person has seen their mortgage repayment double (could they do the same for rents? I doubt it but who knows). In other words, above a certain level the Government will pay the mortgage. They will then come up with a repayment scheme – over say 20-30 years that mortgage payers will then repay the Government.
Such a scheme would represent massive financial moral hazard, but it is the sort of thing the Tories would do under the disguise of “keeping people in their homes”. The irony is, that I expect the Tories would use QE to finance such a scheme.
Given the scale of the crisis to come and other financial pressures building up on top, the Tories are now between the devil and the deep blue sea. No pun intended on the blue bit. I see no way out for them. If there is the crisis that I predict above, then house prices should collapse. To put it simply, mortgage rates at 8-10% plus, with the average price of a UK house at £270 grand and asking prices at £350grand is cloud cuckoo land economics. It don’t add up.
Years of neglect on affordable housing by both Tory and Labour (YES, YOU TOO LABOUR) is about to hit home.
” there must be tax increases to balance QE. These must come from the wealthiest alone. I have explained such a programme many times before.”
If QE were used to increase unemployment/sickness benefit levels to something realistic, wouldn’t the resulting increase in transactions balance out the QE?
They might, but would not solve the problem of inequality
Well, we know Hunt is unlikely to do it. Nor will he do hardly any of the other suggestions you make. He has already said that the energy support bill may not go beyond April, if that. And he intends to balance the books, more or less, which means an austerity program. He was terrible as health secretary and many working in the health sector still remember and still hate him, calling him by his alternative name unapologetically. While the markets “seem” to like him, I think this is no more than the reaction to Truss no longer being in charge, so to speak. I wouldn’t take this seriously, as Hunt appears to be their “friend”. What a mess — going from one type of disaster to another type. The public has to take on MMT. There is no other reasonable way out.
All I am seeing and hearing relates British economic policy wholly to satisfying foreign investors; and ‘longer term’ the hope more than expectation that wholesale international gas prices settle down> That is an economic ‘policy’ for Britain’s future? There is nothing wrong being in such a predicament?
Even if I give credit to the Bexiters that they genuinely wanted to “take back control”; in what was is this latest panic reaction, “taking back control”?
We are living in a world of utter delusion.
Why do the markets seem to be calmed by the introduction of treasury orthodoxy when it is quite clear that the prime minister herself is not a subscriber? How can slashing taxes a month ago, on the basis it would increase growth, be followed by a cancellation of tax cuts today without the markets being spooked? After all, without growth there is no way for inflation to be defeated (we were assured).
The biggest threat? Possibly…. but I think Austerity is a bigger one.
Indeed, we are seeing the market moderate its expectations of rate rises precisely because traders think that the BoE will respond to the tighter fiscal policy under Hunt.
Whatever the case, things look grim.
‘Grim’ is about right.
Markets can smell blood in the water and now that they have whipped up a ‘baitball’ they are waiting for the final kill.
How could we deal with that? Well, tax them on what they make of undermining UK plc, a nice big fat financial tax bill at the end of it – that’s what I’d do if I had the chance.
But all the other measures you speak of seem reasonable to me. But it is really now the time for financial transaction taxes now, given how much money has been made out of this disaster.
In the struggle between the BofE anti-inflation policy and Trussonomics growth we have just experienced, the BofE won. In a Conservative government, therefore, Austerity wins; again. Hunt actually defended the 2010-onwards Austerity programme in his Parliamentary statement. He is just re-using the same old toolbox, over and over again. We should not forget that Truss actually confessed the failure of 12 years of Conservative government. We would be going round in circles, if it wasn’t obvious it is actually a downward spiral to which Conservatism has no answers.
They have failed; but what do we know from Hunt’s response to disaster? We now merely know that they have no solutions to the problems of contemporary British economic reality they can draw from the manual of Neoliberalism; so we are now endlessly in a high tax, low growth, austerity driven, poverty creating economic cycle that is now an endemic, hopeless fact of British life.
He was bragging about cutting
We know what is coming
I’d imagine Hunt’s long term as Health Secretary saw him carrying out a lot of preparatory work for selling bits of the NHS off to the American insurance companies. He’ll no doubt dust off that folder sharpish, providing he is able to keep his hands on the levers of power for the longer term.
Truss appears to be on the verge of a complete breakdown. Can’t quite bring myself to feel sorry for her, but it would be better for her sake if she was booted out sooner rather than later.
The Tories, of course, will leave her ‘in charge’ as long as they think it will help them one iota and she’ll be discarded at the first opportunity after that.
I thought this opinion piece in The Guardian today was pretty good for a change https://www.theguardian.com/commentisfree/2022/oct/16/the-guardian-view-on-central-bankers-dont-put-them-in-charge-of-the-crisis
Well, Hunt sneaked this one in today. Conspiracy Theorists will be having a field day (J P Morgan and a US Hedge fund now “advising” the Government. How illuminating).
Jeremy Hunt announces new economic council to provide government with ‘expert advice’
Lib Dem Treasury spokesperson Sarah Olney said: “An advisory panel of purely wealthy asset managers in the middle of a cost-of-living crisis proves just how out of touch this Conservative government is.”
https://news.sky.com/story/jeremy-hunt-announces-new-economic-council-to-provide-government-with-expert-advice-12723247
I have done a recording for Times Radio tonight suggesting the TUC’s chief economist should be on the panel
Aaaah – you see – The Shock Doctrine – what a surprise!!
Perhaps a piece from you on Japan and why it’s doing what it is would be appropriate. It would probably need to cover what the USA is up to as well, seeing as exporting inflation to we here among others appears to be part of that (in an effort to maintain dollar hegemony, some say). We appear to have got caught up in a global economic conflict largely initiated by a cornered American financial system in which ordinary folk everywhere are naught but the poor bloody infantry together with their wish for a decent standard of living. Your thoughts would be welcome.
I just do not know enough about Japan
Sorry…..
You could try Bill Mitchell’s website
http://bilbo.economicoutlook.net/blog/?p=50605 – as an example…
I might
But can anyone get through one of his posts?
Bill Mitchell is in Japan right now. You might give his blog a look (billy. Log)
Autocorrect got me — it’s billy blog
I read it often but a good bit of it’s over my head. I ask as it would be helpful to read the same ideas but expressed differently in the hope that between them I can create and fill out my mental picture of what’s happening in Japan which at the moment is decidedly woolly. Any suggestions welcome!
The myth of BoE independence dominates unfortunately and poisons the debate.
Added to the myth that markets just formed from individuals without the fuel of a Government printed money system then we have a perfect storm of ignorance to drive us into the ground.
A charter for the necro-economy.
on the 22 july Richard wrote
Truss cannot do media, let alone appear to be able to think on her feet. Her economics is incoherent. She appears to have no understanding of government accounting. And her claims on delivery are false, unless the claim is that she has delivered on the intention to breach international law, undermine the Good Friday Agreement and threaten peace. There is a staggering lack of reality surrounding almost everything about Truss.