Order!

FILE PHOTO: British Foreign Secretary and Conservative leadership candidate Liz Truss attends a Conservative Party leadership campaign event, at Artemis Technologies in Belfast Harbour, Belfast, Northern Ireland, August 17, 2022. REUTERS/Clodagh Kilcoyne/Pool

In the House of Commons, when members of Parliament become rowdy, the Speaker will often bellow ‘Order, Order!’ Much of the same treatment is needed for gilts and sterling, both moving in a violent manner that historically has typified the breakdown of an economic regime.

There are several lessons to be learned here – one of which is that when making policy there is a need to be cognizant of the broader economic and financial environment. A financial climate troubled by inflation, rising interest rates and dangerous geopolitics is not one in which mistakes will be tolerated.

The early schoolboy/girl errors of the Truss government mark the cumulative effect of a long process of policy neglect and geopolitical decline. The death of Queen Elizabeth II has, amongst many other things, contributed to the sense that an era has passed, and that a new, more testing one is upon us.

Wrapped up in all this is the Brexit project, which has drained the UK economy of its vitality (investment, productivity and growth have stalled badly), exhausted the patience of Britain’s international partners and debased the political climate in the UK. That Brexit is not working is a clear message from financial markets.

Another longer-term message is that Britain’s outsized role in the international economy and world stage is now over.

Some years ago, the economist Barry Eichengren produced a paper that showed that through history, as empires have declined, so too has the role their currency has played in the international economy. This has led some to posit that the dollar should start to waken as we enter a multipolar world. If Britain does prove this theory correct, there should be a long lag to dollar weakness, if that is to happen. Bear in mind that at the time of the American Civil war, one pound bought ten dollars, and this fell to 4 at the time of the Suez crisis and, collapsed to 1 now.

A further source of comfort for Americans is that unlike the UK, the USA is not breaking up. In Britain, Brexit has detonated history such that Scottish independence is now likely in the next five to ten years, the reunification of Northern Ireland and the Republic is widely discussed, and there is even an upswing in Welsh independence sentiment.

Looking ahead, the chief issues now are in the short term whether economic and financial volatility will persist, and by association whether the Truss government survives its experiment with an economic model that appeared to work in 1980’s America, and then more challengingly, what becomes of the idea of Global Britain, and logically the ‘Little Britain’ that Liz Truss appears to be trying to create.

In the short term, there are two obstacles – the volatile financial market outlook and the rupture in the credibility of Britain as an investment destination, and a major economy (for comparison – British 10 year bond yields are 4% (helped lower by renewed buying by the Bank of England) whereas that of its neighbour Ireland trade at 2.7%).

In particular the reputation of the Tories as the stewards of the economy is in smithereens. The Tories face ongoing questions regarding their closeness to Russian money, and to the London hedge funds that shorted sterling.

There is now considerable speculation as to whether Kwarteng and Truss can continue – one wag compared her disastrous round of regional media interviews to that of King John in 1216, who whilst trying to fend off rebellions and invasions, caught dysentery in Norfolk, lost the crown jewels in The Wash and died in Nottinghamshire.

Kwarteng may be defenestrated after the coming Tory Party conference, but Liz Truss would be nearly impossible for the Tories to remove, because of the simple fact that there would be loud calls for a general election.

In the longer term, the UK needs at least two changes of tack. The first is an economic model akin to that of small, advanced economies like Sweden, Singapore and Switzerland that priorities access to good education and public goods, focuses on the drivers of productivity, values the rule of law, good institutions and the people who run them (the sacking of Sir Tom Scholar from the Treasury was significant in this regard). In my view, it is unlikely that Britain will adopt this approach, even though it has been shown to produce high quality long-term growth in a range of countries (The Lessons of Little States).

The second changes relates to the political system. The distasteful chaos of the Johnson premiership and the incompetence of the Truss one have resulted in a record lead in the polls for Labour. Should they come to power in a subsequent election, one choice that may confront them is electoral reform.

Introducing proportional representation in the place of the first past the post system would radically alter British politics – it would force collaboration, more coalitions and arguably foster a more policy focused debate. Importantly it would make it easier for parties to evolve. Brexit is largely the result of deep internal divisions within the Tory party that poisoned national politics because there was no suppleness in the party system.

Such a change might re-establish growth, and a sense of ‘order’ in Britain.

Have a great week ahead,

Mike

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