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The last days of old New Labour

Barring the kind of miracle that even the devoutly religious would find implausible, Britain is on course for its first Labour government in 14 years.  Only the timing of the next general election remains unclear.  Will Sunak commit political seppuku by calling an early election next May, or will he cling on until November or even January 2025 and let the electorate deliver the coup de grȃce?  Either way, and following last week’s catastrophic by-election defeats, we are on course for a Tory defeat worse than the one suffered by John Major in May 1997.  There is a difference though.  By 1996, Tony Blair’s New Labour was not just the beneficiary of growing discontent with a Tory Party well past its use-by date, but was also winning millions of voters to its promise of a “third way” back to prosperity.  Keir Starmer, in contrast, looks set to be the first modern party leader to bore his way to power.

Both main parties will be offering us the political equivalent of microwaved leftovers when the election is finally called.  Because both have reverted to type, as if the past thirteen years – or even the past half century – hadn’t happened.  Under Rishi Sunak and Jeremy Hunt, the Tory government have circled back to the failed politics of David Cameron, even as Tory activists attempt to resurrect the ashes of St. Margaret of Finchley.  At the same time, Starmer’s Labour actually have revived the putrefying corpses of old establishment Blairites like Barrister David Lammy, BBC presenter Liz Kendall, and Bank of England economist Rachel Reeves – only Angela Rayner (who is playing the John Prescott pretend-lefty role this time around) appears not to be singing from the Blairite hymn sheet.  And there is more than a suspicion that the Dark Lord himself lurks in the shadows pulling Starmer’s strings… little wonder that while winning an historic victory in Tamworth, Labour also broke the record for the lowest turnout (35.9%) in an election where the seat changed hands.

It is though, one thing to win elections.  It is something quite different to successfully govern a country… even at the best of times.  And as Sunak can attest, even with a massive majority in parliament, once you have lost the electorate – especially in an economic downturn – your government is finished.  And we can say with some certainty that an incoming Labour government, which doesn’t really have the electorate behind it to begin with, is going to be bound up in the worst economic crisis since 2008 – possibly something even worse. 

There is absolutely nothing in the policy announcements made by this new iteration of old New Labour which suggests they are even aware of the economic catastrophe which is already unfolding.  Still less that they have even the slightest clue as to how we might go about solving or even mitigating it.  Meanwhile, where Labour is in office – notably in London and Wales – the experience of Labour government is that they have been enthusiastic supporters of all of the Tory policy errors which have turned what would have been a recession into a full-blown – and probably unresolvable – crisis.  Indeed, rather like some third rate tribute act, as philanthropist Peter Thiel recently observed, old New Labour seem to be engaged in the impossible task of turning the clock back 25 years:

“The temptation has always been to find a straightforwardly economic solution. Getting science and tech back on track is pretty hard. There was a one-time Right-wing fix by Thatcher and Reagan in the 1980s: deregulate, cut taxes and allow lots of mergers and acquisitions to happen. That gave the economy an enormous lift. Then there was a one-time Clinton-Blair solution in 1995-2007, which was globalisation. It was also a way to increase GDP and a far more ruthless way than capitalism because it led to huge amounts of inequality. There were some gains from that. Sadly the centre-left still believes we can go back to this.”

The deeper problem is that politics is downstream from an economics which is itself divorced from any grounding in the real world.  And without such a corrective grounding, it is all too easy to assume that political programs which seemed to work long ago can be dusted down and reapplied irrespective of all of the things that have changed over a quarter of a century.  But Britain in 2023 is a very different place to Britain in 1997.  The two obvious differences being that back then, Britain had more energy – real, actual energy; coal, gas, and oil – than it knew what to do with.  And crucially, this energy was the collateral against which the Blair government was able to engineer its debt-based boom.  The second difference is that when Blair came into office, the baby-boomer generation was at its productive peak – earning, spending and being taxed at a higher level than ever before.  In 2023, all but the very youngest boomers have left the workforce and are drawing pensions.

Less obviously, the process – begun under Thatcher – of flogging off national assets and allowing agriculture and industry to move offshore were continued and accelerated under Blair, so that the City of London and its network of tax havens emerged as the mainstay of the UK’s post-industrial economy.  But post-2008 – and especially after the theft of private assets of Russian oligarchs – the City of London has lost its reputation as a safe place to store ill-gotten wealth…  Which might not have been a problem if the oil was still flowing and, especially, if the UK economy was a thriving centre of hi-tech manufacturing, exporting to the world and providing high numbers of well-paying jobs at home.  But, of course, the reverse is true.  The North Sea now depends on subsidies, and even then, cannot provide sufficient oil and gas to power the domestic economy, still less bring in the much-needed dollar reserves to fund government spending.  The manufacturing sector has been shipped offshore – with the few plants that remain merely assembling components made elsewhere for export into a European market which has become harder to access.  And far from generating millions of high paid jobs by expanding education, Blair’s big achievement was grade inflation and the creation of a burgeoning precariat class.  Even the self-employment – which used to be an incubator for new economic growth – encouraged by Blair turned into a low-paid gig-economy refuge for people unable to find decent employment.  Between 2000 and 2022, the number of self-employed workers grew by 40 percent while self-employed earnings plummeted… the self-employed are no longer a powerhouse that old New Labour can use to lead the way out of the depression.

The concept of “a good election to lose” comes and goes.  As Philippe Legrain observed ahead of the 2010 election:

“Some election victories are a poisoned chalice. With hindsight, it was fortunate for Labour and catastrophic for the Conservatives that John Major won in 1992. Sterling’s ejection from the ERM shredded the Tories’ reputation for economic competence, and five years of in-fighting, blunders and scandal consigned the Conservatives to the political wilderness after 1997. It seemed for a while as if the party might never win office again. The Tories would surely have bounced back more quickly if they had lost in 1992. Conversely, a Labour victory in 1992 could have been fatal. Had the pound plunged within months of Labour taking office, the party’s chances of re-election would have been remote. The Labour government would have marked a brief progressive interregnum between long periods of Conservative dominance.”

Compared to 2024, 1992 will be seen as a golden age of economic prosperity.  Even before the election is announced, the UK will be in a recession greatly exacerbated by a massive mortgage default crisis as 1.4 million low-interest mortgages have to be rolled-over at an impossibly higher rate.  This though, is only the tip of the iceberg that is sinking the UK economy.  We caught a glimpse of the bigger crisis last month, when Birmingham council declared the equivalent of bankruptcy.  But Birmingham is not the only, and far from the most indebted, technically bankrupt local authority.  Indeed, the fear is that more than half of local councils across the UK have debts which are unsustainable at the current interest rate.  And central government – which will ultimately have to bailout these profligate councils – has debt issues of its own.  These were revealed – perhaps a little artificially – following Liz Truss’s failed attempt to make unfunded tax cuts, which sent a wave of panic through the bond (i.e., government debt) markets.

Speaking at Saudi Arabia’s Future Investment Initiative Institute’s summit (a forum similar to Davos, but without the techno-utopian psychopaths) Noel Quinn, CEO of HSBC warned that European governments – including Britain’s – are in a precarious economic situation:

“I’m concerned about a tipping point on fiscal deficits…

“When it comes, it will come fast and I think there are a number of economies in the world where there could be a tipping point and it will hit hard…

“The real challenge for Europe is near-term and probably medium-term growth.  [Europe] will get inflation under control, although there is the potential for a second wave because wage inflation is still not under control in Europe and particularly in the UK. I think we’re all seeing evidence of that biting now in our economies.”

The potential crisis being alluded to here is of governments such as in the UK running up so much debt that, in a globally-synchronised recession, they lose control of interest rates.  This is because, while sovereign governments can create their own currency at will, they rely on borrowed Eurodollars to fund public spending and to pay down trade imbalances.  Those Eurodollars (dollars created outside the USA) are loaned against the supposed “asset” of future taxes on UK businesses and households.  And these taxes, in turn, are estimated on the basis of future economic growth.  So that, as growth disappears and a period of depression sets in, international investors (mostly institutions) become wary of lending in exactly the same way domestic banks are curbing their lending to UK businesses and households today.  And what lending there still is has to be at higher interest rates to compensate for the additional risk of default.

Ironically, in our debt-based economy, this curtailing of lending serves to remove even more currency from the system – globally and domestically – thereby worsening the conditions which created the new credit crunch to begin with.

In theory, an exporting state can print its way out of the problem because its international trade brings in more foreign – mainly Eurodollar – income than it needs.  However, the fact that the world’s leading exporter – China – is unwillingly selling its dollar holdings in an attempt to stave-off an economic crash, demonstrates that there are limits to this.  In any case, for a major importing state like the UK, currency printing will not work because it drives up import-inflation – which includes a large part of our essential consumption of items like energy, food, and fuel.  Moreover, by devaluing the currency in this way, the government would only succeed in forcing interest rates even higher.

Were the UK economy to cross the tipping point which is exercising global bankers like Quinn, the government and Bank of England would be unable to use low interest rates and quantitative easing this time around, because the rest of the world would refuse to provide the dollar-denominated debt to fund it.  The unpalatable result probably awaiting Rachel Reeves when she arrives in the Treasury next year, will be a requirement to ditch spending pledges, raise taxes, and slash public services to the bone – IMF-style – in an effort to dramatically lower the UK government’s borrowing.

If this wasn’t bad enough, there are the black swan’s of global instability that we have yet to spot, along with the two very obvious dragon kings – Russia cutting off the gas (which is currently getting to Europe via third parties) and conflict in the Middle East shutting the Strait of Hormuz – effectively cutting Europe’s supply of gas from Qatar.

An incoming UK government in 2024 may well find itself already in the centre of this crisis.  But even if the crisis has not broken, the incoming government will have it hanging over them, haunting every waking hour.  And there is nothing to suggest that a Labour Government would be intellectually equipped to understand the mess they find themselves in, still less to devise and implement a realistic plan to mitigate the damage… which is something that an already hard-pressed majority are unlikely to ever forgive them for.

As you made it to the end…

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