aOne of the unfortunate consequences of the Truss/Kwarteng 44-day economic experiment is that there will now almost certainly be an overreaction. It was proper and just that the free-market owners should be brought down by the markets in which they believed. The irony is that! But the danger now, with all this talk of a black hole in the nation’s finances, is that in its efforts to restore “credibility,” Sunak/Hunt’s economic experiment could jeopardize the country’s social fabric, while not necessarily preserving credibility. in the markets.
To put it bluntly: when the G7 central banks are on the warpath, deliberately fomenting the forces of stagnation to fight inflation, there is a danger of a repeat of what, in the early 1980s, I called “sado-monetarism” – as if Sado-Brexit wasn’t enough.
A little bit of conversion, which isn’t completely irrelevant. At the International Monetary Fund conference in Belgrade in 1979, your reporter was happily talking with US Federal Reserve Governor Henry Wallich, when we were interrupted by Federal Reserve Chairman Paul Volcker, who said, “Stop talking to reporters, Henry. I need you.”
The rest is financial history. Volcker returned to Washington to raise interest rates and raise them and raise them. This was followed by what his enemies called the “Volcker stagnation.” He was fighting an inflationary spiral unleashed by the second oil crisis of 1979-80. Higher interest rates, while causing a domestic recession in the US, also pushed up the dollar. This posed difficulties for many developing countries whose debt was denominated in dollars.
It also threatened trouble for the British economy because it pushed the pound to parity with the dollar in January 1985.
This was embarrassing for Prime Minister Margaret Thatcher, who requested the help of President Ronald Reagan. The Americans intervened to support the pound sterling in the foreign exchange market, and the pound recovered. It may have fallen to less than a dollar at those usurious exchange offices, but the official rate remained — just above a dollar: a symbol of economic masculinity. Yes, Thatcher liked to say “You can’t beat the market,” but she made it on that occasion.
Which brings us to the recent sterling crisis. Disavowing Truss/Kwarteng’s economic experience helped the pound recover from other “going down to $1” fears. But former Bank of England Governor Mark Carney is right to remind skeptics that there was a significant depreciation of the currency after the 2016 referendum – about 15% – as market operators immediately assessed the extent of economic damage in store from Brexit.
As former permanent Chancellor of the Exchequer Lord Macpherson said in a recent lecture: “Before Brexit, the Treasury was always seen as the most skeptical of the EU. Since Brexit, it has been seen as the most enthusiastic about Europe. “.
His lecture Treasury Orthodoxy: Fact or Fiction, organized by the Strand Group at King’s College London, was a fine response to Truss/Kwarteng’s attacks on the institution. I like the way he talked about “Treasury’s obsession with frameworks designed to save the government [under either party] of herself.”
He was suspicious of the financial rules being abandoned when “the political price of keeping them became too high”, because “regularly violating the rules damages credibility”.
Incidentally, it is interesting to find a former senior Treasury official indicating that the Sunak/Hunt system “has gone to Unusual lengths to demonstrate its commitment to sound public finances.” (Italics.)
More rules waiting to be broken? The government should listen to Jagit Chadda, director of the National Institute for Economic and Social Research, who says it doesn’t make sense to stick to strict rules “in a world where we’ve been hit by big shocks like Covid, energy and Brexit”. “There is a risk that we will end up with a tighter fiscal policy than is actually appropriate given the trauma that many families are experiencing,” he warns.
But it seems that after a decade of austerity policies misconceived by George Osborne, we are waiting for more. I wonder how this government thinks this will encourage the business investment we need. As for public sector capital spending, MacPherson noted, during the 1976 IMF crisis, it “fallen off the cliff and never recovered.”
However, there are reports of further cuts in public investment coming in this week’s fall statement. “Whoever the gods will destroy, go crazy first.”