Saturday 20th of April 2024

saving the house with rishi.....

Britain’s politico-economic fiasco of the past six weeks culminated in a tragicomic anticlimax. The 45-day Prime Minister Liz Truss resigned, as many had predicted before she even took high office last month. Rishi Sunak, the incumbent Prime Minister (Britain’s third in two months), had vociferously criticized Truss’ flamboyant yet idiotic fiscal plan during the summer run-up campaign to replace Boris Johnson.




In hindsight, while she successfully managed to woo the ultra-right Tories with her anti-immigrant and pro-Brexit rhetoric, her inane economic policies failed to enchant the financial markets. And in mere weeks, as Great Britain nudged normalcy after grieving its longest reigning monarch, Truss’ ill-timed tax cuts and brazen borrowing plans wreaked havoc. The British pound tanked to record low; mortgage rates shot to stratospheric levels – forcing the Bank of England (BoE) to intercede to soothe the markets and safeguard the vulnerable pension funds from collapse.

Admittedly, the United States is witnessing relative political stability – at least compared to the Trump tenure. The American economy is heading toward a recession piecemeal. However, the Federal Reserve shows no sign of panic or loss of control. And the investors are patently not losing confidence in the US government, unlike the jitters on display across the Atlantic. Nonetheless, there are a few concerning parallels between the Western duo.

To recap and analyze in-depth, we should first ask ourselves: Why did the British economic plan backfire? It is a well-known fact that Britain is one of the most pivotal Western industrialized economies – 6th largest in the world. Yet an inflationary mini-budget still earned it a rare public rebuke from the International Monetary Fund (IMF) over fiscal imprudence. Such remarks are usually reserved for emerging economies with a notoriety for fiscal irresponsibility. It was not because of the £45 billion in unfunded tax cuts – Britain’s biggest tax package in over five decades. But it was a reaction to the contradiction sketched by the Truss regime between Britain’s conservative monetary policy and quasi-liberal fiscal strategies. The IMF unerringly realized that this tussle would only exacerbate the economic uncertainty already looming in the aftermath of the Russian invasion of Ukraine.

In a period when the Western world alongside the Bank of England (BoE) tightened policy to wrestle with energy-fueled inflation, the British government tabled a plan – sans any independent assessment of potential fiscal impact – to borrow funds to finance utopian tax cuts and eliminate limits on Bankers’ bonuses. In a span when the working class witnessed ballooning energy bills, the Truss government planned to kickstart economic growth via primitive trickle-down economics without any substantive agenda to invite foreign investments.

Naturally, the financial markets revolted by dumping UK debt causing interest rates to spiral; mortgages to skyrocket; pound to drop to almost parity with the US dollar. The new Chancellor of the Exchequer immediately reversed most of her policies before she even egressed the office, while forewarning of painful spending cuts to come. Still, the markets shadowed the announcement of the UK’s next Prime Minister with an ambiguous reaction as sterling slipped 0.17% against the greenback – erasing the earlier gains – while bonds rallied to pre-budget levels.

Thankfully, the United States is not even remotely in the same shoes. But political uncertainty is brewing in the US Congress as well.

The Biden administration has somewhat restored the lost stability totemic to the American political scene. The Make America Great Again (MAGA) tendencies have receded if not completely effaced. And the United States is seemingly back to its classical balance of diplomacy and deterrence that was noticeably missing since 2017. Yet, not all is sunshine in the domestic and international dynamics. The Democrats welcomed this year with a thin majority in both houses. Their mid-term election prospects gradually improved with collective success in Europe against Russia. The Republican blunders like the reversal of Roe v. Wade further favored Biden’s case.

However, the short-sightedness of the Group of Seven’s (G7) ambitious price cap on Russian energy supplies and China’s force posturing in the Indo-Pacific region disillusioned the American patriots. Iran’s bold collusion with Russia by allegedly supplying military drones in Ukraine has further weakened the American illusion of power. The recent slap in the face has been the Saudi betrayal leading OPEC+ to cut global oil supply by 2 million barrels/day, even after Biden bumped fists with crown prince Mohammad Bin Salman (MBS) during his domestically criticized visit to Saudi Arabia in July.

As the gasoline prices have picked up in the last few weeks and inflation is increasingly proving obdurate, the Democrats could lose both houses – or at least the Senate – which could plausibly trigger a Britain-like bedlam. The trigger point is somewhat apparent: The contentious US debt ceiling.

According to the IMF estimates, the US and the UK are two of the most highly industrialized economies running huge deficits in both their budgets and current accounts. According to data from the IMF’s World Economic Outlook (WEO) database, Britain’s current account deficit this year would be about 4.8% of its Gross Domestic Product (GDP); 3.9% for the United States. Both nations have borrowed over 4% of their respective GDPs to fund these gaps. Such huge deficits imply a continual need for capital inflow. Now I admit that advanced economies like Japan and France also run huge government deficits. But no member of the G7 has a deficit on their current account quite like that of Britain and the US register. And while I unequivocally agree that the US treasuries are currently running in the opposite trajectory of UK gilts, a crisis could ensnare the American economy if the Republicans gain control of either of the houses of Congress and enforces a debt limit on government borrowing.

While theoretically, it could push the US government to default on its debt and plunge the global economy into chaos, the more likely outcome is a compromise in the form of spending cuts – a repeat of Obama’s begrudging submission to Republican pressure in 2013 in hopes of a long-term deficit-reduction deal. Nonetheless, this impending political browbeating could spook the already febrile bond markets, courtesy of the aggressive tightening schedule of the Federal Reserve. Remember, investors’ doubt in the British government’s fiscal plan caused the current market meltdown, not any actual sign of imminent default. It illustrates that in the sensitive market environment today, all it takes is market skepticism that gradually snowballs into a formidable economic nightmare – even for an advanced economy.

Another risk is the bustling value of the US dollar. This year alone, the greenback has gained more than 18% against a basket of key currencies, according to the benchmark ICE U.S. Dollar Index. The Fed’s accelerating rate hikes have pushed the dollar to a multi-decade high – even against the currencies of its major trading partners. Consequently, American exports have turned expensive; imports have turned cheaper. Thus, US exports are in line to fall while imports gain, further widening the current account deficit. I fear that a sell-off in the US treasury market could invoke a financial crisis dwarfing the Great Recession of 2008. Fortunately, US securities are a staple for risk-averse investors seeking an economic haven. And virtually every major global transaction – from the oil market to commodities – is settled in the US dollar. Thus, I reckon that the US markets are far more stable than their British counterparts.

Ultimately, the ubiquity of the US economic presence does pose some challenges. The economic pain exported globally by the United States due to a straightening dollar could lead to financial turmoil in one of its major trading partners. Japan is a perfect example. The rate hikes by the Federal Reserve have plummeted the Japanese yen to a 32-year low against the US dollar. Yet the Bank of Japan (BOJ) is persistent in keeping interest rates low to allow its historically moribund inflation to liven up.

My apprehension, however, lies in the perception of inflation. Japan’s inflation of 3% is not demand-driven but imported from abroad, on the back of inflated fuel and food prices. Recent history suggests that Japan would not resort to rate hikes, which would pinch local businesses and dent public sentiment without actually lowering inflation. However, Japan could stop buying or even partly liquidate its immense holdings of US treasury securities totaling about $1.23 trillion to service its staggering debt – circa 260% of its GDP – without cutting public spending. This scenario is just one example of many that could spark a crisis. The frightening reality is that unlike the contained financial debacle of Britain, a panic run in the US capital markets would devastate the global economy. And hence, Britain’s fiscal blunder should be an omen to the US policymakers to address its chronic budget and current account deficits, and mitigate its prohibitive borrowing sprees before it is too late to redress.








By Adam Bychawski

When Rishi Sunak made his first public speech as prime minister last week, he admitted what his predecessor Liz Truss had failed to just hours earlier. “Mistakes were made,” he said of his former rival’s brief spell in office, adding that he was here to fix them.

Truss might be out of Number 10 but her think tank allies — like the Institute of Economic Affairs (IEA), who inspired her disastrous economic programme — are not.

Sunak has installed several of the pressure group’s biggest supporters in his cabinet and made one of its former staff members his chief spin doctor.

As the economic fallout from Truss’ premiership becomes clearer,  Conservative voices are now calling for the IEA to own its mistakes, while leading economists have warned Sunak to jettison its alumni and “stop listening to those mad, mad people.” 

It was just over a month ago that Truss’ first chancellor Kwasi Kwarteng announced his doomed mini-budget. On that fateful September evening, as he toasted the plans with delighted hedge funders at a champagne reception in Chelsea, there may also have been the sound of corks popping in the offices of the Institute of Economic Affairs (IEA), just a stone’s throw away in Westminster.

The IEA’s long game had finally paid off. Truss and Kwarteng’s rise to the top of the Conservative Party was the culmination of years of grafting behind the scenes. Their budget read like the think tank’s wish list — deregulation, check; tax breaks for the rich and corporations, check; promises to crack down on unions; check.

Formed to Promote Free Market Economics

Ostensibly an educational charity, the IEA was formed in 1955 to evangelise and convert politicians to the doctrine of free market economics — a mission it has had remarkable success with.

At its peak in the 1980s, Prime Minister Margaret Thatcher credited it for “creating the climate of opinion which made our victory possible.” All the while, it has never disclosed its funders, but journalists have uncovered donations from oil giants like BP and ExxonMobil and the tobacco industry. 

For a time, it seemed as though the IEA would never return to those Thatcherite heydays. That was until it found a fresh crop of Tory politicians willing to champion its cause in 2015.

Among them were Priti Patel, Dominic Raab, Chris Skidmore and both Kwarteng and Truss — with whom it formed the Free Enterprise Group, a party within the Conservative Party for free-market fundamentalists.

When Truss won the Tory leadership contest in September, it was a victory for the libertarian wing that the IEA had quietly been incubating through the era of Prime Ministers David Cameron and Theresa May era.

“Britain is now their laboratory,” declared prominent Conservative activist Tim Montgomerie on Twitter. Mark Littlewood, the think tank’s director since 2009, responded with just a smiling “sunglasses face” emoji.

At a budget-day press conference, held together with the Taxpayers’ Alliance — another opaquely funded, right-wing pressure group — Littlewood was asked by a reporter if he was anxious about having their policies tested.

“It would be a bit odd, I think, for a think tank to resent or regret that an administration was adopting its policies,” said Littlewood. “If it turns out that these don’t work, I think the IEA has got a lot of hard thinking to do.”

In the weeks that followed, the pound crashed to its lowest point against the dollar since decimalisation, the price of government bonds rose sharply and the Bank of England was forced to make an intervention to prevent a run on pension funds — narrowly avoiding a repeat of the 2008 financial crash.

Tory MPs began pointing fingers — and not just at the leadership. “The impression the new government has given is that it is run by libertarian jihadists, blowing up the Conservative Party and the country in the process,” wrote former minister Robert Halfon in The Times.

His colleague, Simon Hoare, told BBC Radio 4’s Today Programme that “the mild flirtation with Tea Party libertarianism has been strangled at birth.” 

Truss sacked her chancellor and reversed the tax cuts but in the end it wasn’t enough to save her premiership.

As things went from bad to worse, the IEA attempted to distance itself entirely from the policies it had welcomed just weeks before.

“I’m very sorry the PM’s efforts to move the U.K. in a pro-growth, low-tax, pro-enterprise direction has failed. She had a difficult hand to play, but she also played the hand badly,” said Littlewood in a statement on the day of her resignation. Later, he insisted that the IEA’s prescriptions “had not been tried.” 

The think tank did not respond to a request from openDemocracy asking for an interview with someone willing to defend its record.


‘Own Their Mistakes’

The sudden shift in tone raised eyebrows even among fellow right-wingers. “I think they need to own their mistakes, frankly,” James Blagden, chief data analyst at the centre-right Conservative think tank Onward, told openDemocracy.

“We’ve had comments recently trying to backtrack and rewrite history as if this wasn’t something they were cheerleading for at the time. Mistakes were made economically and politically and those that were calling for that need to have some humility.”

Economists were even less sparing about the think tank’s dalliance with the government’s economic policy.

“They have to fess up to the fact that they’ve been a visitation of evil spirits on the British people,” Danny Blanchflower, a British-American economics professor at Dartmouth College in the U.S., told openDemocracy.

“Everybody in the U.K. is poorer because of Trussonomics and the IEA because of the moron premium — the permanent rise in the cost of borrowing that the U.K. has experienced, completely unnecessary. Their incompetence has lowered the well-being of every single person in the country.”

Blanchflower, who previously sat on the Bank of England’s interest rate-setting Monetary Policy Committee, urged Sunak to “throw out everything the Institute of Economic Affairs says.”

But like Truss, the prime minister has been closely embedded in the world of “dark money’”political groups from the very start of his career. 

Before becoming an MP, he cut his teeth at Policy Exchange, a right-wing think tank that called for the anti-protest measures currently being considered before Parliament. Soon after he was elected in 2015, he wrote a report calling for the creation of “freeports” around the U.K. for the Centre for Policy Studies, which enthusiastically endorsed Truss’ budget.

Both are now likely to be carried through under his premiership.

Last week, Sunak refused to confirm raising benefits in line with inflation, prompting fears that he may continue Truss’ attempt to shrink the state.

The new prime minister might have ditched Trussonomics, but whether he will bring the party’s libertarian experiment to an end remains to be seen. 


Adam Bychawski is a reporter at openDemocracy. He tweets @adambychawski.

This article is from openDemocracy.


The views expressed are solely those of the author and may or may not reflect those of Consortium News.








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