Post by Deleted on Oct 16, 2022 18:44:41 GMT
Project Fear was right all along
Six years of policy confusion and ineptitude has brought a calamitous loss of standing. Call it revenge of the Remainer Establishment, if you like. The revolution in the British economy promised by Leave campaigners six years ago finally seemed to go the way of all revolutionary movements this week: it ended up eating itself.
Downbeat predictions by the Treasury and others on the economic consequences of leaving the EU, contemptuously dismissed at the time by Brexit campaigners as "Project Fear", have been on a long fuse, but they have turned out to be overwhelmingly correct, and if anything have underestimated both the calamitous loss of international standing and the scale of the damage that six years of policy confusion and ineptitude has imposed on the country.
A serious house price correction, substantially higher interest rates and a permanently impaired exchange rate may be the least of it.
Credibility is all in politics, finance and economics; this week was the point at which the UK Government finally managed to lose all last remaining vestiges of it. Britain's trusted institutional framework, together with its hard won reputation for sound money and certainty in policy, all went down the pan.
Perhaps I exaggerate, but not since the humiliation of the International Monetary Fund bailout in 1976 have we seen an unravelling quite as spectacular. This too from a Tory Government with a substantial overall majority. It is scarcely believable.
These are dark days for Tory MPs, who will be acutely aware that loss of reputation for economic competence is electoral poison for their party. As the former Chancellor, Philip Hammond, has already observed, that reputation has been comprehensively trashed by what's just occurred.
British Prime Minister Liz Truss attends a news conference in London, Britain, October 14, 2022
'This was the week the Government lost all remaining vestiges of credibility' Credit: Daniel Leal/Pool / REUTERS
I feel sorry for Kwasi Kwarteng. He now bears the dubious distinction of being Britain's second shortest serving Chancellor ever after Ian Macleod, who died in office almost immediately after being appointed.
Others have been chasing the silver medal hard in the turmoil of the last several years; Sajid Javid lasted just six months, and Nadhim Zahawi only eight weeks. Anyone would think we had become Italy or Greece, such is the turnover in key government positions and the growing sense of political, economic and fiscal instability.
Nor is the storm by any means yet over. Stripped of all authority and credibility, it is hard to see how Liz Truss, the Prime Minister, can survive the traumas of the past several weeks. As Norman Lamont said of John Major, she's in office but not in power.
The U-turn on corporation tax, the scapegoating of Kwarteng, and his replacement with the supposedly steadying hand of Jeremy Hunt is unlikely to save her. The cut in spending plans that she implied on Friday may be what the markets demand, but politically it threatens finally to destroy her.
Kwarteng was a likeable Chancellor with many of the right intentions. He is not wrong about the need for radical action to correct multiple long term weaknesses and deficiencies in the UK economy. Many of the supply side measures announced in the mini-Budget were more than welcome, and might in time have made a significant difference to the UK's long term growth trajectory.
Yet the unfunded tax cuts were always going to be a bridge too far. Fiscal policy 101: you do not attempt to do a permanent fiscal giveaway against the backdrop of sharply rising inflation and interest rates, a punishing energy crisis, a current account deficit swollen to an unprecedented 8 percent of GDP, and a seemingly intractable black hole at the heart of the public finances.
To have rejected independent assessment of the plans by the Office for Budget Responsibility only further added to the sense of alarm in financial markets.
When we talk about "financial markets", it is important to note that they are not some god-like arbiter of policy whose judgement on matters is beyond challenge, but essentially just a lot of excitable children who, with herd-like conformity, are merely chasing the money.
The idea that the £18bn a year of corporation tax revenues that seemed to be at the centre of this week's rout would make the difference between national solvency and insolvency is almost beyond ridiculous. It would not have done. Yet sadly it became totemic in a wider loss of political and economic credibility, which has been cumulative now over a number of years.
Corporation Tax How Britain will compare
It is perhaps not so surprising that the passionate Remainer who became a passionate Brexiteer should choose to throw her Chancellor to the wolves in order to save her own skin.
Yet the fact is that Truss was in lockstep with Kwarteng in challenging "economic orthodoxy" and the institutions that were its standard bearers. On the campaign trail she was, if anything, even more of a zealot for economic radicalism than Kwarteng.
In any case, she plainly didn't understand the sometimes destructive way markets interact with policy. It's been a rude awakening.
In the end, it was Andrew Bailey, Governor of the Bank of England, who brought matters to a head, by insisting that there would be no extension to the bond buying programme he had initiated to counter forced selling by UK pension funds.
This has been widely portrayed as another foot in mouth episode by a Governor with something of a reputation for gaffes. Having failed, despite all the warning signs, to see the surge in inflation coming, the Bank fully deserves whatever criticism is thrown at it. The Bank has failed to conduct itself well in recent times.
Even so, the Governor had little option but to say what he did. It makes no sense at all for a central bank, which is supposed to be tightening policy to fight inflation, to be simultaneously loosening it through resumed asset purchases.
To do so would be seen by "Mr Market" as monetary financing, or what is sometimes referred to as "fiscal dominance", where monetary policy is used to support the government's fiscal needs.
By making the programme time-limited, the Bank was able just about to pass its intervention off as justified on financial stability grounds. It would have been game over had Bailey made the programme open ended.
Already, acute loss of credibility in monetary policy would have spiralled out of control, and the rout in bond markets would have gotten even worse.
Once the Bank had made clear that it would be ending the programme as scheduled, the Government had no option but to reverse its fiscal plans. It would have been mayhem in the markets on Monday had it not done so.
"Economic orthodoxy" is back in the saddle. But then it never really went away. Instead we had a brief aberration in which the Government, having dispensed with all sensible advice, thought bizarrely that it could defy gravity.
If it had been done differently it might have succeeded, but it was not. We'll be paying the consequences in reduced standing and prosperity for years, if not decades, to come.
Related Topics
Six years of policy confusion and ineptitude has brought a calamitous loss of standing. Call it revenge of the Remainer Establishment, if you like. The revolution in the British economy promised by Leave campaigners six years ago finally seemed to go the way of all revolutionary movements this week: it ended up eating itself.
Downbeat predictions by the Treasury and others on the economic consequences of leaving the EU, contemptuously dismissed at the time by Brexit campaigners as "Project Fear", have been on a long fuse, but they have turned out to be overwhelmingly correct, and if anything have underestimated both the calamitous loss of international standing and the scale of the damage that six years of policy confusion and ineptitude has imposed on the country.
A serious house price correction, substantially higher interest rates and a permanently impaired exchange rate may be the least of it.
Credibility is all in politics, finance and economics; this week was the point at which the UK Government finally managed to lose all last remaining vestiges of it. Britain's trusted institutional framework, together with its hard won reputation for sound money and certainty in policy, all went down the pan.
Perhaps I exaggerate, but not since the humiliation of the International Monetary Fund bailout in 1976 have we seen an unravelling quite as spectacular. This too from a Tory Government with a substantial overall majority. It is scarcely believable.
These are dark days for Tory MPs, who will be acutely aware that loss of reputation for economic competence is electoral poison for their party. As the former Chancellor, Philip Hammond, has already observed, that reputation has been comprehensively trashed by what's just occurred.
British Prime Minister Liz Truss attends a news conference in London, Britain, October 14, 2022
'This was the week the Government lost all remaining vestiges of credibility' Credit: Daniel Leal/Pool / REUTERS
I feel sorry for Kwasi Kwarteng. He now bears the dubious distinction of being Britain's second shortest serving Chancellor ever after Ian Macleod, who died in office almost immediately after being appointed.
Others have been chasing the silver medal hard in the turmoil of the last several years; Sajid Javid lasted just six months, and Nadhim Zahawi only eight weeks. Anyone would think we had become Italy or Greece, such is the turnover in key government positions and the growing sense of political, economic and fiscal instability.
Nor is the storm by any means yet over. Stripped of all authority and credibility, it is hard to see how Liz Truss, the Prime Minister, can survive the traumas of the past several weeks. As Norman Lamont said of John Major, she's in office but not in power.
The U-turn on corporation tax, the scapegoating of Kwarteng, and his replacement with the supposedly steadying hand of Jeremy Hunt is unlikely to save her. The cut in spending plans that she implied on Friday may be what the markets demand, but politically it threatens finally to destroy her.
Kwarteng was a likeable Chancellor with many of the right intentions. He is not wrong about the need for radical action to correct multiple long term weaknesses and deficiencies in the UK economy. Many of the supply side measures announced in the mini-Budget were more than welcome, and might in time have made a significant difference to the UK's long term growth trajectory.
Yet the unfunded tax cuts were always going to be a bridge too far. Fiscal policy 101: you do not attempt to do a permanent fiscal giveaway against the backdrop of sharply rising inflation and interest rates, a punishing energy crisis, a current account deficit swollen to an unprecedented 8 percent of GDP, and a seemingly intractable black hole at the heart of the public finances.
To have rejected independent assessment of the plans by the Office for Budget Responsibility only further added to the sense of alarm in financial markets.
When we talk about "financial markets", it is important to note that they are not some god-like arbiter of policy whose judgement on matters is beyond challenge, but essentially just a lot of excitable children who, with herd-like conformity, are merely chasing the money.
The idea that the £18bn a year of corporation tax revenues that seemed to be at the centre of this week's rout would make the difference between national solvency and insolvency is almost beyond ridiculous. It would not have done. Yet sadly it became totemic in a wider loss of political and economic credibility, which has been cumulative now over a number of years.
Corporation Tax How Britain will compare
It is perhaps not so surprising that the passionate Remainer who became a passionate Brexiteer should choose to throw her Chancellor to the wolves in order to save her own skin.
Yet the fact is that Truss was in lockstep with Kwarteng in challenging "economic orthodoxy" and the institutions that were its standard bearers. On the campaign trail she was, if anything, even more of a zealot for economic radicalism than Kwarteng.
In any case, she plainly didn't understand the sometimes destructive way markets interact with policy. It's been a rude awakening.
In the end, it was Andrew Bailey, Governor of the Bank of England, who brought matters to a head, by insisting that there would be no extension to the bond buying programme he had initiated to counter forced selling by UK pension funds.
This has been widely portrayed as another foot in mouth episode by a Governor with something of a reputation for gaffes. Having failed, despite all the warning signs, to see the surge in inflation coming, the Bank fully deserves whatever criticism is thrown at it. The Bank has failed to conduct itself well in recent times.
Even so, the Governor had little option but to say what he did. It makes no sense at all for a central bank, which is supposed to be tightening policy to fight inflation, to be simultaneously loosening it through resumed asset purchases.
To do so would be seen by "Mr Market" as monetary financing, or what is sometimes referred to as "fiscal dominance", where monetary policy is used to support the government's fiscal needs.
By making the programme time-limited, the Bank was able just about to pass its intervention off as justified on financial stability grounds. It would have been game over had Bailey made the programme open ended.
Already, acute loss of credibility in monetary policy would have spiralled out of control, and the rout in bond markets would have gotten even worse.
Once the Bank had made clear that it would be ending the programme as scheduled, the Government had no option but to reverse its fiscal plans. It would have been mayhem in the markets on Monday had it not done so.
"Economic orthodoxy" is back in the saddle. But then it never really went away. Instead we had a brief aberration in which the Government, having dispensed with all sensible advice, thought bizarrely that it could defy gravity.
If it had been done differently it might have succeeded, but it was not. We'll be paying the consequences in reduced standing and prosperity for years, if not decades, to come.
Related Topics
For the record, I actually don't agree with them that project fear was right, lots of remainer hyperbole plastered wall to wall about some really silly things. And their campaign got fined for promoting misinfo did it not? In any case, it's instructive when even the Torygraph, Express, DM etc keep pointing out how much of a failure Brexit has been. This is the most indicting headline so far though.
What were Warner's leanings previously?
