The tragedy of the fall of Liz Truss

Liz Truss is out, liberals everywhere are cheering. why? Because the overwhelmed and outgoing prime minister of the United Kingdom has challenged conventional wisdom about how to create a thriving economy. It has threatened to undermine elites who advise defeatist policies that encourage slow growth and celebrate big government rather than competition, investment and entrepreneurship.

It also pledged to boost investment in oil and gas production in the North Sea, and scrap the country’s ban on hydraulic fracturing, as UK energy bills soar. More than 50 percent from a year ago. Climate activists were horrified.

The rapid fall of the embattled Prime Minister is a sad day for England and the developed world.

Liz Truss was elected to revitalize a stagnant country still reeling from Brexit, as well as from misguided energy and tax policies. 10 Downing Street has been occupied by her Conservative Party for 12 years, but has struggled to keep taxes low in light of growing social services demands, especially during COVID-19.

When Truss took office just weeks ago, inflation was at 10 percent, growth was slowing and real GDP was below the pre-coronavirus level of 2019. Government debt was close to 100 percent of GDP, and the deficit was growing. . A month before she took office, the budget deficit was nearly double what had been expected, its highest level Any August registered.

In short, I inherited the chaos.

Many businesses, especially profitable financial firms, fled London after Brexit, fearing that England’s exit from the European Union would burden deals and employment across borders. It was a legitimate concern; The rules were unwritten, and in the fast lanes of international finance, transactions were not waiting for the new system to be established.

some City left 7000 jobs; For many companies, it was not an easy decision.

Truss wanted to lure them back, in part by removing banker bonus caps that had been imposed in the wake of the financial crisis. More broadly, Truss has committed to cutting taxes, confident that such measures will encourage a wave of new startups and growth. Kwasi Quarting, Treasurer in the Truss government, described the moves as essential to his “unabashedly pro-growth plan” for the economy.

Kwarteng chest a “small budget” He outlines his ambitions, which have included enticing foreign visitors with value-added tax (VAT)-free shopping, deferring a planned increase in corporate tax, and lowering prices slightly overall. The budget called for higher unfunded spending and, effectively, higher short-term deficits.

The plan caused Kwarteng and Truss to be widely ridiculed and slandered; The mini budget has been ridiculed as reckless. Bond markets fueled cash. Prices of English government bonds, called gilts, have fallen as interest rates have risen, causing extreme volatility in markets that are usually buoyant and almost panicking among traders.

Maybe he pushed the plan’s gears at the wrong time, when markets were particularly nervous. Suggesting measures that would increase the deficit in the short term was a mistake. But she is not entirely responsible for the swift rejection of her program and leadership. Pension managers, global central banks that have turned a blind eye to “free” money, the Biden White House and Federal Reserve Chairman Jerome Powell are also the culprits in this story.

The cause of the crisis in the markets was not only that lower tax rates would increase the deficit, but also that pension administrators They benefited from their holdings of bonds In order to fulfill their obligations towards retirees.

She borrowed pensions against her holdings of gold to fund riskier investments, thus creating a scenario not unlike that seen during the financial crisis, when companies went bankrupt to take advantage of her holdings of typically secure mortgages.

It’s also true that as Biden and Democrats in Congress pushed trillions of dollars in non-essential spending as the economy was already recovering from the COVID lockdowns, the Federal Reserve raised interest rates, pushing the dollar to all-time highs against the pound. This did not help calm market tensions.

Facing a market defeat, the Bank of England stepped in to buy gold bonds that had been dumped in bulk as pension managers had to scramble to meet the demands for collateral. This rare intervention convinced investors and critics that Truss’s proposed policies were reckless.

So, is Liz Truss really the villain in this piece, or are the people who crafted a period of super easy money and pushed investors to risk their holdings really to blame?

It’s an important question because advanced economies, including the United States, all require robust growth to fund the growing demands of welfare states. It is also important that it appears to justify opposition to the light regulation and low-tax approach taken by US Presidents Reagan and Kennedy, British Prime Minister Margaret Thatcher and, most recently, President Trump.

The so-called “supply-side” economies have remarkably stimulated the most prosperous period in our history. Guiding those who encourage tax cuts and smaller government could be pivotal to getting the United States and Western Europe back on track after the severe blows of COVID shutdowns, excess spending, and now, hyperinflation. Policymakers in the United States and elsewhere must begin to reverse the tsunami of government spending as we try to correct our economic ship; Set fire to the Liz Truss show would argue against such a change of direction.

Unfortunately, Truss’ economic agenda was poorly presented by a junior finance minister, who was quickly ousted, but the damage to her credibility made the continuation of her leadership impossible.

Truss’ case will come down as a lesson on financial sobriety, but spending cuts will not be part of the teaching. This is a tragedy.

Liz Beck is a former partner of the major Wall Street firm Wertheim & Company. Follow her on Twitter @lizpeek.

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