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An excuse made early

The problem with trying to assess British politics over the past four months is that, despite my earlier error, Liz Truss turned out to be such a useless politician even by today’s low standards.  While her rapid rise from student activist to prime minister suggested a degree of Machiavellian cunning, Truss turned out to be inept – failing to lay the ground for her Thatcher tribute act even with her own parliamentary party.  What – sort-of – worked for Thatcher in the 1980s – largely due to the income from North Sea oil – would have been a disaster had Truss been permitted to proceed with her policy program.  This said, it was broadly in line with a modern Tory philosophy which favours low taxes and greater deregulation.  Given time, Truss and Kwarteng may well have won a majority of the parliamentary Tory party behind their program of reforms.  But crass stupidity, apparently, prompted them to try to force through an un-costed reform package before carrying out the groundwork.

I remain uncomfortable about what occurred next, in part because of the ease with which it was done.  Truss became prime minister solely on the votes of less than 100,000 Tory members but inherited the 80 seat parliamentary majority won by Boris Johnson on a very different policy manifesto.  As a result, Truss was always going to have a legitimacy problem… something that wasn’t helped by Britain’s longest reigning monarch apparently losing the will to live within hours of having to appoint Truss as prime minister.

Nevertheless, it is reasonably clear that a cabal of technocrats, media editors and thwarted Tory “grandees” worked to engineer a financial crisis in order to depose Truss and hand the premiership to the even less legitimate Sunak.  Truss contributed to her own removal insofar as the reforms she attempted to railroad through became the economic spark which ignited a pile of dry tinder in the pensions sector… dry timber which the Bank of England was well aware of, and primed to extinguish before the conflagration got out of hand.

It is here though, that the problem runs far deeper.  Not only did the Bank of England officials know there was a crisis brewing in pensions, but they understood that it was their own bond buying and low interest rate activities over the previous decade which had caused the problem in the first place.  Pension funds being obliged to seek ever riskier means of bridging the gap between the 5% plus returns promised to pensioners and the 0.5% or less returns on the government bonds they are legally obliged to hold.  Many pension funds depend upon the interest rates on government gilts falling, so that, when insufficient foreign buyers arrived to purchase UK government debt, pension funds faced massive losses on margin calls.

The point is that it was the Bank of England far more than Truss, which was responsible for the brief and partially engineered crisis last October.  They should never have allowed the pensions sector to become so fragile to begin with.  And it is in this light that we should treat Bank of England Governor Andrew Bailey’s comments earlier this week.  As Ben King and Daniel Thomas at the BBC reported:

“There is still a ‘hangover effect’ from the financial instability seen during the prime ministership of Liz Truss, the Bank of England governor has said.

“Andrew Bailey told MPs that the cost of government borrowing, which soared after the mini-budget, had normalised.  But he said international investors were still wary about lending money to the UK government.”

For sure, the reluctance of international investors to loan US dollars to the UK government is real enough.  But it is mendacious to pretend that this has anything to do with Truss.  Indeed, a more likely policy candidate for this reluctance might be the extreme financial sanctions against even Russians who oppose the Putin government in response to the invasion of Ukraine – London’s reputation as a place where dollars can be safely laundered has been shattered beyond repair.

More likely though, the true cause of the problem is simply that there is a global dollar shortage resulting from international banks’ growing fear that the global economy is on the verge of a major downturn… one which Andrew Bailey and his colleagues are playing a large part in helping to generate by creating unemployment and falling wages as their preferred antidote to rising prices – most of which are the result of a lockdown-accelerated breakdown of global supply chains rather than monetary inflation.  And, as happened between 2006 and 2008, the central bankers’ interest rate rises may well result in an even bigger version of the global credit crunch.  And this time around, what was too big to fail may turn out to be too big to save.

What Bailey understands is that the majority of the British public – including most economists – are clueless about where money comes from, about the essential role of debt, or about the likely negative impact of interest rate rises on the volume and velocity of currency in circulation.  What successive opinion polls do show, however, is that a majority of the electorate blame the Tories in general and Truss in particular for the current cost of living crisis.  So why not pander to public ignorance?  Especially when it lets the true culprits escape the blame.

The fact is that if Truss hadn’t been removed by her own backbenchers, she would have been removed in spectacular style by the British electorate once the economic crisis reached the point that an election could no longer be avoided.  What though, of Andrew Bailey, the Monetary Policy Committee and the senior policy managers at the Bank of England?  The public have no means of voting them out, despite their being far more guilty of creating the conditions for an economic crisis.  The best we can hope for – and it is likely a vain hope – is that an incoming government might install some replacements.  But even if that happens, the substitutes will be from the same, deluded neoclassical school of economics and will be committed to repeating the same policy mistakes as the current incumbents.  Only root and branch reform will lead to genuine change… and nobody is offering that.

In any case, even the somewhat dim Sunak may turn out to be just clever enough to follow Bailey’s lead and cast early blame on Truss for the economic storm which is beginning to break over us.  And who knows, given the economic policy vacuum in Keith Stammerer’s Labour Party, that may just be enough to allow Bailey and Sunak to keep their jobs.

As you made it to the end…

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