Prime Minister Liz Truss did not comment on Britain’s financial collapse for several days. The Independent newspaper on Thursday carried her picture under a scathing headline: “MISSING: HAVE YOU SEEN THIS PM?” Truss then commented, choosing local radio stations as the non-hazardous venue.
Their replies were so wooden that the vice-leader of the rival Labor Party declared: “Truss has finally broken her long, painful silence with a series of short, painful silences.”
Bitter notes aside, Truss’ performance is no joke. For the past 10 days, the British pound has swung dizzyingly from weak to extremely weak and then weak again.
Long-dated 50-year government bonds lost a third of their value at times and only recovered from this unprecedented fall when the Bank of England stepped in. Foreign watchdogs from the International Monetary Fund (IMF) to rating agency Standard & Poor’s have condemned Truss’ unfunded tax cuts that sparked the flight.
This is clearly bad for Britain. Truss’ net approval rating plummeted from minus 9 percent to minus 37 percent in a week. But Truss’s predicament also reflects a larger problem. In the supposedly advanced economies, the return of inflation has increased the risk of extravagant political gestures. For the most part, however, politicians have failed to get the message.
For 23 years – the period from the collapse of the hedge fund Long-Term Capital Management in 1998 to Biden’s stimulus in 2021 – subdued inflation enabled central banks to dampen policy failures. Weak regulation could give free rein to the financial world; However, repeated rapid rate cuts in 1998 and thereafter cushioned the shock. Politicians might fail to prepare for a virus pandemic, but central banks bought trillions of dollars in government bonds and provided politicians with the money to prop up struggling economies with stimulus checks. The return of inflation changed all that.
The main job of central banks is to stabilize prices so the money in your pocket stays roughly worth it. Money is supposed to be a store of wealth and a unit of account: when it no longer fulfills these functions, the operating system of the economy collapses. Because of this anti-inflation imperative, central banks now have to think twice before guaranteeing policy expediency. Bailouts include interest rate cuts and government bond purchases. Controlling inflation requires the opposite.
The British crisis illustrates the pain of this transition. Announcing her plan for naked tax cuts, Kwasi Kwarteng, Chancellor of the Exchequer of Truss, behaved like a go-go start-up that spends money like it’s water and smugly assumes venture capitalists will provide liquidity without end.
With zero interest rates, capital seems to cost nothing. Investors would put money into almost every project because of the TINA principle: there is no alternative.
Well, now there is an alternative. The Federal Reserve has hiked interest rates to fight inflation. Investors can put their money in US mortgage bonds and get 6.7 percent, more than double what they would have gotten just a year ago. Like a startup that burns money without generating revenue, a government that cuts taxes without squeezing spending can no longer count on the leniency of the markets. RIP TINA and hello MARA. The markets are rational again.
But politicians around the world have yet to adapt. As The economist It was recently noted that world leaders responded to the energy crisis of the 1970s by telling people to wear an extra layer and cut fuel consumption. “We will not starve,” declared the Chancellor calmly.
Today, on the other hand, politicians are throwing subsidies at consumers and suspending gas taxes. When the oil shock hit in 1973, the actual value of the UK power bill changed little. This time the UK government is gobbling up 6.5 per cent of its GDP to protect citizens from fuel costs.
And the rescue reflex goes beyond the energy sector and Europe. In the US, the government guarantees bank deposits and mortgages, subsidizes health care and more; Now President Joe Biden is proposing to spend hundreds of billions of dollars to forgive student debt. Adding up the government’s contingent liabilities, The economist calculates that Uncle Sam has debts worth more than six times GDP on the brink and that ratio has skyrocketed recently. The inflation holiday is over. The adjustment will be painful.
https://www.independent.ie/opinion/comment/the-inflation-vacation-is-ending-and-its-going-to-be-painful-despite-liz-truss-and-joe-bidens-efforts-42037401.html The inflation holiday is ending and will be painful despite the efforts of Liz Truss and Joe Biden