Not since Laurel and Hardy moved Way out West have, we had a better comedy double act than Truss and Kwarteng…if only things weren't quite so serious.
Raising the curtain on Friday's inaugural "fiscal event", Truss and Kwarteng decided to work without a safety net or even (seemingly) a script: instead, and with all the flair of an ageing fairground barker, Kwasi blustered out a gargantuan £150 Billion (totally unfunded) energy support package, and £45 Billion in unfunded tax cuts (the biggest in forty years): without any OBR statement to explain what he was up to, or where the money was coming from (as is conventional in such circumstances…not the absence of a statement that is, but having one at all). He calmly went on to unpack his "hope" that this would lead to economic growth in two years or so…or maybe longer (who knows). Liz patted him on the back as he sat down, just like any good straight man (or woman) should.
It all seemed to be going so well…
But the markets weren't in any mood for back-slapping, and Nomura wasn't alone on Monday when it announced, with an icy chill (www.nomura.com), that "hope is no substitute for a sound economic policy"…so in between Kwasi sitting down on Friday and Nomura standing up on Monday, over the course of three short days, Sterling and the UK's standing as a major economy were ruthlessly savaged by what the Daily Mail has taken to calling (with all the authority of Mr Bean) "City Slickers".
And on Tuesday, without any obvious irony either, Dario Perkins, Managing Director for Global Macro at TS Lombard (www.tslombard.com), was openly talking of a Moron Risk Premium: "The problem isn't that the UK budget was inflationary, it's that it was moronic. And a small open economy that seems to be run by morons gets a wider risk premium on its assets - currency down, yields up".
It now costs the UK Government more to borrow on Five Year Gilt Markets than either Italy or Greece (each having undoubted cultural charms, but neither exactly a model for financial rectitude): and as of Tuesday (while I'm writing this), the yield on Five Year UK gilts was 4.3%: and remember, higher doesn't mean better in this context: Venezuela is currently drowning under an eye-watering 83% yield rate, reflecting a profound unwillingness by investors to lend on the open market. And now, astonishingly, that applies increasingly to the UK, too…only last week, the equivalent yield was just a shade over 2% (half of what it is today).
None of that would matter much if Kwasi Kwarteng and his cohort of financial geniuses weren't looking to borrow anything anytime soon or weren't facing an almost unprecedented burden of public debt: but that's not the case either. During the current financial year, Britain's current account deficit is set to average out at 8% of GDP (www.pantheonmacro.com), and that gruesome landmark has only been achieved three times since 1772 (every time (until now) during the dark days of the Second World War). To put it mildly, this was never going to be a good time to announce an unfunded tax giveaway of £45 Billion …signalling, with all the subtlety of a runaway bull, that Britain was intent on borrowing even more.
And that, to put it shortly, is the malaise currently sitting at the heart of UK financial markets.
After Friday's pantomime, investors are (rightly) concerned that the UK's current account deficit is going to get even wider, so gilt rates soar, and sterling inevitably gets weaker to bring imports into line with exports…and as Sterling weakens (it reached a forty year low against the US Dollar on Monday, as well as losing significant ground against every other major currency (including the Rubel))…as Sterling weakens, the prospect of heart-stopping hikes in interest rates looms ever larger down the line. UK interest rates of up to 6% are no longer being whispered about in the corridors of the City of London…they're being bellowed from the rooftops, and not just in London, but clean across the world.
So what does Mr Kwarteng do about that? Well, apart from declining to make any immediate comment at all on the market turbulence caused by his announcement last Friday (since when was that a prerogative of any Treasury Minister, let alone the Chancellor of the Exchequer?), he released a brief public statement on Monday to say he would be explaining in two months how his package of cuts would be funded…and, before coming out with that masterpiece in obfuscation, he unwisely went on television to say there were yet more (unfunded) tax cuts on the way…stoking further fuel on the smoking debris of his economic planning (such as it is).
There simply aren't any other words for it…this isn't any way to run an economy.
As to how to do things better, take a look at India's Economy: Narendra Modi has been in office since 2014, since when his Government has encountered all the same macro-economic shocks Britain has suffered (post-financial crash, COVID lockdowns, and war in Ukraine amongst them), but the Subcontinent's current account deficit is currently 1.5% of GDP (more than five times less than the UK deficit), and India's GDP is growing annually by 7.7% (as opposed to 1.9% in the UK in June: up from 0.4% in May). That is being achieved with a continued sense of quiet confidence that has made India the fastest growing large economy in the world…without any theatrics and no comedy double acts…just a resolute vision and real-world faith in the future.
You could do a lot worse, and Britain would do well to take note.
Executive Overview
It's been a turbulent week for Sterling and the UK economy generally…but there are lessons to be learned.
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