If Truss was the answer it is difficult to work out what the question was

Written By: - Date published: 9:34 am, September 30th, 2022 - 52 comments
Categories: economy, International, uk politics - Tags:

Liz Truss has been UK Prime Minister for just over three weeks.

I thought at the time it was a particularly strange decision.  And from afar it is hard to understand how this could occur.

I initially thought that Rishi Sunak would have been disastrous.  An uber rich self made man whose family’s commitment to the country is such that his wife sought non domicile status for tax purposes.

But at least he was occasionally coherent in the debates.  And he would not have been as fiscally irresponsible as Truss has turned out to be.

By comparison Liz Truss campaigned essentially on slogans and drawing comparisons between herself and Margaret Thatcher.  And promising tax cuts.

My left wing admittedly removed understanding of the nuances of the UK campaign meant that I thought she would be by far the worst choice but here we are and she is the next UK Prime Minister.

I could be accused of bias but I thought her first forary into Parliamentary Question Time was an absolute train wreck.

And what else has she done?  Well she did promise more roads, tax cuts and she has ruled out a windfall tax on power companies that do not depend on Russian supplied natural gas but have still increased their charges to what the market can sustain.  Various sectors are laughing all the way to the bank.

This is all dwarfed by the events of this week.  Promising to remove the top tax rate and funding this by increased borrowing has blown the pound, increased interest rates, caused the Bank of England to take urgent action to prop up pension funds, fueled inflation and effectively guaranteed deep cuts to public spending.

Gordon Campbell captures the insanity of what is happening clearly in this passage:

It may not be complicated. At base, Liz Truss and Christopher Luxon appear to be preaching the same old neoliberal gospel. They both plan to use tax cuts to starve the government of the revenue it needs to provide public services and to rebuild the national infrastructure that’s currently falling apart. To the centre right though, poverty relief and infrastructure rebuilds should be treated first and foremost, as opportunities for private sector profit. The US neoliberal tax reformers have been pretty open about their end game:

Grover Norquist, who founded Americans for Tax Reform in 1985 at the urging of President Reagan, declared in 2001: “I don’t want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.”

As mentioned, because tax cuts have never been a path to economic growth anywhere in the world, Luxon has been forced to distance himself from the catastrophe unfolding in Britain. In that respect, Liz Truss is doing all New Zealanders a very big favour. She is providing real time evidence of the damage National’s tax policies would be likely to inflict here.

Perhaps most importantly the UK is now viewed as a economic basket case.  Even the IMF has criticised the proposal and warned that it may increase inequality, which to me appears to be inevitable.

And the polls have changed dramatically.

Truss was probably hoping for a honeymoon period.  Instead she is facing the prospect of a rebellion from within her party,

The shortest term for a UK Prime Minister who formed a Government and was not a caretaker was 96 days.  I suspect bets are being laid about if Truss will beat this record.

And locally National continues to receive questions about how it could afford tax cuts and keeps fudging its answers.

Nicola Willis was interviewed this morning and confirmed:

  • Its primary goal is to index tax bracket adjustments to inflation.  This is the first commitment.
  • It will get rid of the top tax bracket in its first term.  This is so we can “retain skilled people in New Zealand” and the extra taxes have “turned off talent”.
  • It will reverse Labour’s new taxes.
  • All of these commitments sit within its commitment to “responsible fiscal management” and this is key to them.
  • Disciplined spending is the primary way it will be able to afford tax cuts.
  • It remains committed to balancing the books and over time paying off debt.
  • It will fund this through fiscal responsibility.  Its spending track will be lower than Labour’s.
  • Cutting the top tax rate will not increase inequality.  Really??
  • Three waters will be axed and public servant numbers will be cut.

The policy is dog whistling to the wealthy elite.  They believe that the preferential treatment is justified because they are the wealth creators.  It does not matter how often trickle down is disproved they will continue to think it is justified and they will fund political parties that share their view which is essentially based on greed.

All eyes will be on the UK’s economy over the next few months and there will be intense interest in National’s next policy release.  Don’t be surprised if electors start to repudiate en masse Grover Norquist’s proposition that the state should be weakened until it can be drowned.

52 comments on “If Truss was the answer it is difficult to work out what the question was ”

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  1. ianmac 1
    30 September 2022 at 9:54 am

    Gordon: They both plan to use tax cuts to starve the government of the revenue it needs to provide public services and to rebuild the national infrastructure that’s currently falling apart.

    But of course. By letting the Health system degrade they will have the long wanted excuse to Privatise Health. They headed that way in the 90s and will get more determined next time.

  2. tc 2
    30 September 2022 at 10:30 am

    IMO the question was 'we need someone to front a final pillage, Sir Rod's mob will take it from there…..'

    Who better than thacherite Truss.

    Classic play to empty the cupboards on the way out of office limiting the incoming govt options.

  4. Nic the NZer 4
    30 September 2022 at 11:17 am

    There are a couple of un-resolved questions around this.

    1) Is that polling broad and reliable (are UK Labour in line to actually win the next election)?

    2) When did the Tory polls actually collapse?

    3) Is the Al Jazeera release of the 'Labour Files' have some relation to this in terms of timing and contents? (at this stage it appears to just be being ignored).

    On 3 it plays into all my biases so I'm wondering if its essentially a hit piece.

  5. Tony Veitch 5
    30 September 2022 at 11:19 am

    One good thing about Liz Truss' PMship is that she might lay to rest for ever the much repeated MYTH that Conservatives (including the Natz) are good at economic management.

    They are not! JKeys 'rock star economy' was based on massive immigration, rising house prices and media promotion. Conservatives govern for only a section of any community – the wealthy elite who fund them.

    This Labour government has been given a lot of stick for the slowness of their response, but you can't turn around the ship of state overnight. While I can easily criticise the Lab. govt for not being radical enough and yes, perhaps being neoliberal lite, I know they are light years ahead of the Natz in managing the economy for ALL NZers.

    And Luxon shares Truss' values! God help this country if the Natz ever, ever get back into power!

  6. tsmithfield 6
    30 September 2022 at 11:23 am

    To be fair, she didn't actually crash the economy. The fundamentals for that were already there when she took over. More like the straw that broke the camels back I think.

  7. Nic the NZer 7
    30 September 2022 at 11:24 am

    "Perhaps most importantly the UK is now viewed as a economic basket case."

    The BoE has patched up the balance sheet of some pension funds by buying guilts and can do it again and in other areas indefinitely. The actually issues with Truss policy are the impacts of inequality and we should not be relying on the market to fix that or even pass judgement on it (because it won't). If these things are going to change it will change through the policies of subsequent governments, not how they are nudged by future markets.

    • Poission 7.1
      30 September 2022 at 1:08 pm

      The Pension funds are large part of the UK economies wealth 3.24 trillion (2020 and 118% of gdp) they are required to invest in stable long term assets such as gilts (Gordon Brown ) for the last 20 years.

      This created some stability to the economy,where borrowing is 66% domestic,and 33% overseas (mostly other pension funds)

      • Nic the NZer 7.1.1
        30 September 2022 at 1:50 pm

        I'm not surprised the BoE jumped in at all. But the leveraged behaviour of these same pension funds appears to have been rather de-stabilizing in this case.

        I don't know what their behaviour would be like, had they not a risk free rate of return asset to leverage (e.g the Treasury simply stopped issuing debt). Maybe the practice of massive leverage of pension funds (which can therefore topple with comparatively small shifts in the guilt market collateral asset values) would desist in this case, but maybe not, or maybe a large number of failures are needed before those kinds of high leverage pension funds disappear.

        • Poission 7.1.1.1
          30 September 2022 at 3:20 pm

          They used derivatives to leverage the assets,when the spreads exceeded the hedges,as the yields increased margin calls came in,The BOE had no option but for financial stability.

          The absurdity is that the risks were already stated,and the Chancellor when revealing the mini budget had turned down a coarse model costing from the Office of budget responsibility.They had already been warned by treasury and Truss's response was to replace the permanent secretary,

          • pat 7.1.1.1.1
            30 September 2022 at 3:46 pm

            The KISS principle applies here….would you lend to someone who you thought had no ability to repay?

            • Nic the NZer 7.1.1.1.1.1
              30 September 2022 at 3:59 pm

              Me, I probably wouldn't anyway, however…

              If it's your money and I get a big enough fee for it many would say sure why not.

            • Poission 7.1.1.1.1.2
              30 September 2022 at 4:01 pm

              The argument could be framed as would you lend to someone,who reduced their income voluntarily,so they could borrow,and live on their credit card.

              The lenders decided a risk premium was necessary,doubling the interest rate,the BOE introduced stability at the long end,and let the market decide premiums at the short end where mortgages are determined,doubled,

              • pat …
                30 September 2022 at 4:10 pm

                Yes you can apply the math to it…I charge huge interest so that i recover the capital before default…but essentially you are saying 'you have nothing to offer…and at some point irrespective of the interest rate you are deemed 'uncrediworthy'….Sri lanka, Lebanon, Turkey…etc

                • Poission …
                  30 September 2022 at 4:21 pm

                  Yep,and all those with mortgages ( lot of floating there ) or business loans will be spending their nights at the pitchfork sharpening classes.

          • Nic the NZer 7.1.1.1.2
            30 September 2022 at 3:56 pm

            Sure.

            But the whole media narrative is how dare the Truss administration effect the fiscal position. It's not, why on earth are pensions operating at high leverage and risk. It's a strategy which relies on the asset (more stable) side of the balance sheet almost continuously coming up in your favour, or this happens.

            There are a few ways that the govt could handle that including just responding to the market, a trick they can implement again if they see fit. They could also take measures to de-leverage the pension system and actually reduce the level of risk practiced.

            While I don't approve of the Truss administration policy in this case these risks also exist for administrations of policies I do approve of. Both in practice and democratically the Truss administration does have sovereignty to make these decisions.

            • Poission 7.1.1.1.2.1
              30 September 2022 at 4:16 pm

              The movement in the long end gilts was 7 standard deviations,the chance being 1 in 390682215445 or an expected occurrence of 1 in 1 billion years.

              Not having understood the risks of the policy,without budget advice suggests strongly that Truss et al do not no what they are doing (the narrative in the finance market being incompetent)

              https://en.wikipedia.org/wiki/68%E2%80%9395%E2%80%9399.7_rule

              • pat …
                30 September 2022 at 4:27 pm

                Its simpler than that…if I charge 20% I expect you to default > 5 years( how much greater is of no concern to me as long as its not less)…at current rates (and policy) the UK is likely bankrupt in 10 years

                • Poission …
                  30 September 2022 at 4:33 pm

                  The markets being the lenders have just doubled the finance cost of their mini budget,that they do not get the problem is troublesome at least.

                  • pat …
                    30 September 2022 at 4:41 pm

                    They are not the only ones…it appears the whole world has forgotten what credit is

                    • Poission …
                      30 September 2022 at 5:06 pm

                      The world forgot that low interest rates are an aberration,not a norm,with a discount rate near zero,now that finance costs are returning (deposit rates) there are rewards for savers,and costs for borrowers.

                      Here households are still saving 16.7b last 12 months,vs 9.5 previous 12 months,they are also moving from transaction and savings to term deposits,so reducing consumption (and gst) whilst increasing withholding tax.

                      What is yet to be determined is the real cost of borrowing,over the next few years,if economic expansion by debt is continued,high inflation and high interest rates will be here for a long time,and an ocr of 4% + to meet risk rating agencies will be the new norm for the next decade.

                      https://www.rbnz.govt.nz/statistics/series/registered-banks/banks-liabilities-deposits-by-sector

                    • pat …
                      30 September 2022 at 5:14 pm

                      Except debt growth cannot continue in the absence of real output growth…and real output is constrained by energy availability….ipso facto debt growth is also unsustainable.

                      And interest is a function of growth.

              • Nic the NZer …
                30 September 2022 at 6:59 pm

                Seriously your telling me I observed a 1 in 1 billion years event?

                Now hang on I'm just updating my prior for, your using an invalid probability model.

                Right, now what probability do you put on the Tory party finding an even worse candidate than Truss and Johnson who also ignores advisors?

                • Poission …
                  30 September 2022 at 7:21 pm

                  That was what the technicals were showing the traders,as they moved between frequency and bayesian statistics,which is why panics are problematic as spreads widen (and hedges don't cover spreads,which is like being underinsured in level 7 event)

                  The swings in global bonds resemble volatility in crypto,as does cumulative wealth destruction in global markets of 33 trillion dollars in the last 3 months,so an unstable system far from equilibrium is hyper sensitive to a tipping point.

                  The polls also show the absurdity of the situation with a 33% swing in 4 days,hard to find a more unpopular policy anywhere.

                  The Tory party has had 4 prime ministers,and 6 finance ministers in the last 6 years,losses like Passchendale and a PM who wants fiscal stimulus in a high inflation,low unemployment environment,its a given.

                  • Nic the NZer …
                    30 September 2022 at 7:55 pm

                    If your probability model is telling you, you actually observed a 1 in 1 billion year event its certainly probably wrong.

                    But if your still happy with that assessment it seems to indicate she was having a really off day, which could hardly be repeated, unless she was spectacularly unlucky then. As with Johnson surely she could not possibly continue to ignore official advice of risks normally speaking.

                  • Nic the NZer …
                    30 September 2022 at 9:58 pm

                    https://www.visualcapitalist.com/the-history-of-interest-rates-over-670-years/

                    Looking at this history of interest rates such magnitude shifts appear to occur about once every 4-5 years. Obviously it makes a difference over precisely which time scale that shift is occurring but no matter how you slice it this isn't a 1 in a billion year outcome. Further, if the collapse had occurred over a couple of weeks rather than days could these funds have handled it without BoE intervention? If they could not then one questions the meaning of a 7-sigma event. This present episode will hardly show up on my linked chart once the BoE intervened anyway.

                    • Poission …
                      30 September 2022 at 10:24 pm

                      More how the Value at Risk models are structured,the traders response,and the concomitant currency depreciation.The spike will stand as an anomalous outlier ( greater then the GFC) to 1979 and reversals are underway to unwind trades as the Hedge Funds realise the impact on the 1/4 performance ( and fees) and unwind some trades.

                      https://twitter.com/business/status/1575699222359412738

                      One other point for the VaR model is the latest years have a huge number of data points in them orders of magnitude greater then the rolling average trade data compilation,in turn modelling each raindrop rather then the passing shower.increases the sensitivity of the trade within the trade.

                  • Nic the NZer …
                    30 September 2022 at 10:52 pm

                    Any 1 in 1 billion year event, might as well be saying this doesn't occur.

                    If your model isn't giving you a minimum 1 in ~1000 years rate for an event you observed its highly suspicious and probably wrong.

                  • Nic the NZer …
                    1 October 2022 at 12:14 pm

                    You seem to be saying that these pension funds were over-rating the stability of the govt bonds to facilitate their more risky investing behaviour. Let me just say "I'm shocked, shocked, to find that gambling is going on in here."

                    • Poission …
                      1 October 2022 at 1:06 pm

                      The outcome from an event (or even a predicted event) can be several magnitudes greater then the calculated loss in a VaR model.

                      eg .

                      For instance, the conditional expectation of a market move, given that it is in excess of 3 mean deviations, will be around 5 mean deviations. The expectation of a move conditional on it being higher than 10 mean deviations will be around 18. This property is quite crucial.The atypicality of moves has the following
                      significance.

                      – One may correctly predict a given event, say, a
                      war, a market crash, or a credit crisis. But the
                      amplitude of the damage will be unpredicted. The open-endedness of the outcomes can cause a severe
                      miscalculation of the expected payoff function.
                      For instance, the investment bank Morgan Stanley
                      predicted a credit crisis but was severely hurt (and
                      needed to be rescued) because it did not anticipate
                      the extent of the damage.

                      – Methods like Value-at-Risk18 that may correctly
                      compute, say, a 99% probability of not losing
                      no more than a given sum, called “value-at-
                      risk”, will nevertheless miscompute the conditional
                      expectation should such a threshold be exceeded.
                      For instance, one has 99% probability of not
                      exceeding a $1 million loss, but should such a loss
                      occur, it can be $10 million or $100 million.

                      Relevance,markets need stability to ascertain risk and information to understand the risk (concomitant with the policy) there are fences there to limit risk,and allow strategic unwinding of position ,they do not have the ability to stop an elephant rampage which was what was unleashed,where investors ran for the hills as the speech was being read to parliament (literally pound falling by paragraph),

                      https://financialservices.house.gov/uploadedfiles/071411nassim.pdf

  8. roblogic 8
    30 September 2022 at 11:45 am

    Truss is yet another far right wolf in sheep's clothing, claiming to "share the values of the Christian faith" while going around doing the opposite.

    Conservatives like to talk *a lot* about free speech, conversion therapy, and trans issues. But they utterly fail to follow a central tenet of Christian faith, i.e. loving their neighbour.

    Instead they plunder nations, impoverish their own people, sell out to predatory corporations, enable epidemics of gun violence and opioid addiction.

    These people are blemishes at your love feasts, eating with you without the slightest qualm—shepherds who feed only themselves. They are clouds without rain, blown along by the wind; autumn trees, without fruit and uprooted—twice dead. They are wild waves of the sea, foaming up their shame; wandering stars, for whom blackest darkness has been reserved forever. (Jude vv12,13)

  9. Sanctuary 9
    30 September 2022 at 12:06 pm

    Truss and Luxon appeal because they both ventriloquise the most lumpen fantasies of the same demographic. That demographic is not particularly wealthy, but is wealthy enough to be profundly insulated from the realities of the day to day functioning of capitalism in their respective countries (viz; averagely prosperous older Pakeha male in Martinborough complaining on telly that we live a Gulag).

    Both Truss and Luxon policy platforms come from same background of being immersed in middle class "free enterprise" ideology.

    Truss is the patron of the fantasies of the Tory audience that elected her, an audience whose fantasies are aggressively hawked by the Murdoch press and she is cocooned by deferential court journalists and MSM interviewers (sometimes reality can come crashing in, like when local radio interviewed her).

    Luxon is all that, and is aggressively hawked by our own right wing media who peddle the same fantasies and cocoon him with deferential interviews, with the added twist that NZ's middle class free enterprise ideologues largely have their wealth tied up in property, so they want above all costs the country to be made safe for rentier capitalism and safe from Maori except in instances of cultural appropriation.

    Truss is an excellent example of structural stupidity and she represents the physical manifestation of the exhaustion of the out of touch, dessicated and self-absorbed British establishment that favours the assinine, the cretinous and the fatuous.

    The trouble for us though is Labour’s response in both countries is to position themselves as the parties of “sound money”. That might be prudent, but for parties founded on the principle of radical redistribution, what will the price ultimately be if they stick to that position?

  10. Drowsy M. Kram 10
    30 September 2022 at 12:23 pm

    Grover Norquist, who founded Americans for Tax Reform in 1985 at the urging of President Reagan, declared in 2001: “I don’t want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.”

    Did someone say "drown it in a bathtub"? Prescient words.

  11. roblogic 11
    30 September 2022 at 2:06 pm

    Tory regime is gonna fall. (Unfortunately Starmer's Labour is full of neoliberal moles)

    https://twitter.com/ElectionMapsUK/status/1575526882853810192?s=20&t=nUNrVUQh4A1zAWHOO7xwcA

  12. SPC 12
    30 September 2022 at 2:07 pm

    The Tory caucus chose to make their two preferred candidates the ones who wanted tax cuts. Tax cuts is their policy. Their remaining time in power is short and they want money in their pockets before they lose office. And they do not fear Starmer as PM (effectively a Labour-LD coalition since the purge of the left), The longer term play is to limit Starmer to reversing the tax cuts and limiting his new spending to that amount to prevent debt growing even larger.

  13. Mosa 13
    30 September 2022 at 5:32 pm

    So UK New Labour is in the lead. If the polls are correct it could be similar to the result here where they totally dominate the commons but their neo liberal prescription will do nothing to arrest the massive structural problems and nail biting inequality. In fact like here Starmer and his right wingers will keep trying to treat the disease with the same medicine expecting a different outcome just like here while camapaigning as " Labour ". They could learn a thing or two from Adern and her New Labour team on how to push catchy slogans but have no plan or can make any difference to many who they solicit votes from but see no improvement.

    The U.K will be the one to watch over the next number of months. I would expect Mike Lynch and the union movement to be a counterweight to any Starmer led market alternative.

    At least the U.K has a real opposition leader in Mike Lynch. We sadly don't.

  14. Ad 14
    30 September 2022 at 8:32 pm

    Both the British PM and Chancellor will meet with the Office of Budget Responsibility.

    Liz Truss to hold emergency talks with OBR after failing to calm markets | Liz Truss | The Guardian

    This is the day before the Conservative Party conference.

    Expect more roiling financial markets out of this next 72 hours.

  15. newsense 15
    1 October 2022 at 2:09 pm

    Oh that’s easy- the question among her backers was who can funnel as much money to us in the next two years and make it difficult for any other government to undo quickly?

    Any other attempt to justify these policies on the basis of economics- spending discipline, trickle down, stimulus etc etc is simply bs to thin out the herd of opposition.

  16. Jeremy 16
    18 October 2022 at 5:16 pm

    I think the lesson isn't that tax cuts can't be stimulating, or even increase the tax take. It is that one shouldn't propose tax cuts in a nation with high government debt, at a time when the world is heading into a global recession or depression, without also outlining exactly how every dollar of tax cut will be matched by a decrease in government spending.

    That's why the market shit the bed. Arare case of simple cause and effect.

    For the first time in a couple of decades economic reality is starting to matter again, and obviously some politicians haven't got the memo yet.

    [I’ve removed your surname from your user name, assuming it was a ‘typo’ – Incognito]