28th September 2022
Today, it is reported, there were almost mass insolvencies of pension funds:
🚨NEW🚨
On the @bankofengland intervention:
Am told the BoE were responding to a “run dynamic” on pension funds – a wholesale equivalent of the run which destroyed Northern Rock.
Had they not intervened, there would have been mass insolvencies of pension funds by THIS AFTERNOON.— Ed Conway (@EdConwaySky) September 28, 2022
I'm told:
– Pension funds getting hammered and losing huge amounts of capital
– Banks forcing them to make margin calls and liquidate assets – so gilts
– Some pension funds losing large amounts of their fund
– Hence BoE stepped in
/— Sam Coates Sky (@SamCoatesSky) September 28, 2022
Pension funds – like constitutional law – should not be exciting.
Pension funds should be dull.
Something wrong is happening.
*
There is a sub-genre of fantasy literature which uses the literary device of a portal.
You go though a wardrobe, or over a rainbow, or down a rabbit hole, or past the second star on the right.
And you are then in another world, where certain fundamental elements are different and strange.
Recently British politics has been unusually volatile, but at least it was within certain familiar parameters.
We had the Regency smugness of David Cameron’s administration; the misplaced Victorian earnestness of Theresa May’s; and the Edwardian charlatanship of Boris Johnson’s.
All bad in their way, but you could comprehend what was wrong about the administration and its approach to law and policy.
But the administration of Elizabeth Truss – despite some early but misleading indications of pragmatism – is of a very different type.
*
It must have seemed so simple, only a few days ago.
Treasury orthodoxy could be cancelled easily – and the permanent secretary Tom Scholar was sacked.
Tax cuts could be announced.
And, at a stroke, the British economy would be “unleashed”.
The new chancellor Kwasi Kwarteng told the House of Commons that the government would “release the enormous potential of this country”.
But.
The problem with words like “release”, “unleash” and, indeed, “unchained” is that they are often mere substitutes for policy.
By using such words you are presupposing that there is a thing which is being constrained that only requires the constraints to be removed.
It is, in its way, a form of magical thinking.
And it must have seemed straightforward to the new administration that all that was needed was for tax cuts to be announced and, hey presto and abracadabra, growth would be be produced:
One suspects that even now at Ten and Eleven Downing Street, the Prime Minister and Chancellor do not understand why the Friday statement has had these consequences.
They did the magic things and said the magic words – powerful words like “release” and “unleash” – but what has actually been released and unleashed is not what they wanted.
*
You could say that the problem is that Truss and Kwarteng are being ideological.
But many practical and effective politicians have ideologies: Clement Attlee and Aneurin Bevan with the creation of the National Health Service, or Margaret Thatcher (at least in her early premiership) and Norman Tebbit (whose trade union reforms are pretty much still in place forty years later).
What is different with the current administration – and this is apparent even after a few weeks – is not that it has an ideology, but that it has nothing else.
There is no engagement with the real world as it is, and no understanding that there is even a real world outside with which to engage.
The fundamental elements of their political vision are different and strange: this is Narnia, this is Oz, this is Wonderland, this is Neverland.
We can enter their world, but they have no notion of ours.
*
Portal fantasies often end with the intruding hero(es) eventually coming back to this world – sometimes changed, sometimes not.
The other world usually carries on, just as before – but without the Pevensie children, or Dorothy, or Alice, or Wendy.
Sometimes, however, people from our world get stuck there, perhaps lost or disguised, unable to escape.
We are currently stuck with our fantasy government, perhaps for the next two years until a general election.
Brace, brace.
We are not in Kansas anymore.
***
Thank you for reading – and now please help this blog continue providing free-to-read and independent commentary on constitutional matters and other law and policy topics.
Posts like this take time and opportunity cost, and so for more posts like this – both for the benefit of you and for the benefit of others – please support through the Paypal box above, or become a Patreon subscriber.
***
Comments Policy
This blog enjoys a high standard of comments, many of which are better and more interesting than the posts.
Comments are welcome, but they are pre-moderated and comments will not be published if irksome.
The comments policy is here.
Thank you for this excellent summary. It does appear that our politicians are living in a parallel universe. Truss & Kwarteng are pursuing an ideology without regard for the reality of the consequences of their actions. Many people, myself included do not understand the motives of Truss & Kwarteng, apart from clues such as blaming poor productivity in the UK on “lazy” British workers. In my view this is simplistic in the extreme, since most British workers that I come across are far from lazy. Perhaps a more serious problem in the UK is that we have a PM and Chancellor who are living in cloud cuckoo land, and do not understand or care about the impact of their actions. This is a prime example of irresponsible management, if ever there was one ? I have the strong impression that Truss & Kwarteng do not have the slightest clue how to “unleash” productivity growth in the UK. The actions of this hapless duo in the last week do not inspire any confidence. Quite the reverse.
It looks like Gordon Brown needs to put his pants over his trousers and save us from KamiKwasi.
Brown didn’t get it all right but he did pull us out of the bankers nosedive.
Well said !
Unfortunately, Brown dug the hole and pushed the nation in to it first. Fortunately, you don’t need to take my word for it, you can download relevant documents from the Treasury web site.
After Labour came to power, Brown initially continued with the fiscal policy of the Conservatives. In fact, you might remember that Labour went through with the privatisation of the rail network, which had been started by the Conservatives before the GE.
But he did three things that helped cause the storm. The first was, right after the election, he announced a level of deregulation of London financial markets that created the situation that brought about the 2007/8 financial crisis.
The second was that he publicly announced that the UK would depart from the Gold Standard and would replace gold bullion as the backing for Sterling with a “basket of international currencies”. Translation: he wanted the Treasury to enter currency speculation. What happened instead was that the price of gold dropped precipitously right before each of his scheduled sales, then sprang back up again afterwards. The UK lost a small fortune to speculators as a result. The third thing he did – with his girlfriend, “Prudence” (remember her), was borrow. By 2007 he had run up the budget deficit from a modest amount when he took over as Chancellor to £166 billion. Then came the crash and in bailing out the banks, he increased the deficit to £322 billion in one year.
We’ve been paying for that ever since.
Interestingly, Brown and Kwarteng share something in common – just as it seems that Kwarteng wasn’t interested in taking OBR advice, Brown was equally insular. Both will go down in history as harming the UK…
Gordon Brown didn’t deregulate the market, the regulations were the same. Application of the regulations was loosened and banks largely left to themselves to apply them. He certainly didn’t cause the crash. That was caused by the US sub prime mortgage defaults and the trading in junk securities that were AAA rated.
As for him abandoning the gold standard, the UK hasn’t been on the gold standard since 1931. He sold some gold reserves, as other European countries also did, to help support the value of the Euro. UK currency reserves have been in cash as well as gold for many decades. Gold isn’t very useful to the Bank of England as selling it in any quantity isn’t easy.
Apologies for the Gold Standard comment – I meant to say that he pre-announced and then sold 417 metric tonnes of gold in a series of tranches. The markets shorted the price and made a killing, and we got short-changed. Again.
As I said, the UK wasn’t the only country selling gold in that period. It wasn’t even the largest seller. British gold was sold in a series of auctions over a period. After the first such sale there was no element of surprise. Also it’s important that the Chancellor is open about such plans so they can be discussed by Parliament.
No word about your claim that it was Brown who caused the 2008 crash?
And just to complete the hat trick; he didn’t borrow to bail out the banks.
He got the Bank of England to do QE, and no, we aren’t still paying it back.
Making the Bank independent was a bit of a con.
Indeed, if anything it was Brown who led international efforts to get the global economy working again.
Nevertheless, if the BoE wasn’t as independent as it is it wouldn’t have been able to decide to intervene this week to prevent pension schemes collapsing due to the collapse of gilt prices.
Amongst your inaccuracies is the one about the Gold Standard which the UK came off in 1971. Gordon Brown was 20 years old.
From then on we have had a fiat currency (look it up).
What a lovely post. It managed to make me smile and that doesn’t happen much these days so thank you for leaving me with images of Oz and Narnia rather than with Britain, Autumn 2022
In any other context, reckless incompetence of this order would result in both of these people losing their jobs immediately.
Considering the number of times you tweeted “Well” during the premierships of May and Johnson, I don’t think it’s fair to say they were within familiar parameters. I think your perspective of Not Normal has shifted because things have been so “constitutionally exciting” since 2016.
Not at all.
“Well” usually marked a foreseeable misfortune. Something clumsy and unforced, but within a familiar world.
“Well” does not work with the fantasies of Truss and Kwarteng – a new vocabulary is needed.
Unwell?
How about “My my”? Similarly understated, but with overtones of the unexpected.
Gosh?
Hell.
Never did the words “what fresh hell is this?” feel more apt…
“Never did the words “what fresh hell is this?” feel more apt…”
To those of us who remember Thatcher’s monetarist, trickle-down nonsense, it’s not even “fresh”.
And it didn’t work for her, either.
We’re starting to get into uncharted territory. It will either work fabulously or we’ll get our “French Style” revolution 233 years late. These things should not be rushed, we’re British after all.
Our supposed betters have lost their fear of the electorate and with it their respect. Hopefully this will be rectified peaceably though current evidence is not encouraging.
Thank you again for your insight. Another metaphoric that occurs to is the metaverse – they, our fearless Metanauts, conceive of a universe, sunlit uplands if you will, and construct it according to that conception – don their VR headsets, striding hand in hand resolutely for the sunlit uplands … all the while walking into the path of a juggernaut
Brexit fantasies were of the same type. And for both it and Friday’s fiscal event, we are paying, in that wonderful newly coined term, the Moron Risk Premium.
They aren’t only morons: the market has decided that – to all intents and purposes – the Tories are a Doomsday cult:
https://www.huffingtonpost.co.uk/entry/investors-see-tory-party-as-a-doomsday-cult-top-analyst-says_uk_63317686e4b01804e08fd55a
Although with more than its fair share of morons, I accept:
https://www.huffingtonpost.co.uk/entry/tory-peer-blames-labour-for-economic-chaos_uk_6333ffdde4b04cf8f35d159c
This is one of your best posts – thanks David.
If you read Britannia Unchained you can instantly recognise the Ayn Rand political philosophy in it. Marina Hyde this week memorably described Britannia Unchained as “a version of Atlas Shrugged set in a Surrey business park”.
There’s nothing novel about the philosophy, even though Atlas Shrugged is a novel. It’s not just small-state conservatism, it’s almost no-state and no-tax rugged-individualism. The profit motive is the only valid motivation. Tax is evil. Government is inherently inefficient because it isn’t a company and doesn’t make profits.
One of the heroes of the novel is a shadowy figure obviously based on Robin Hood, except that he steals from the government in order to refund income tax contributions to rich people. Yes, really!
The problem with the philosophy (which a critical reading of Atlas Shrugged can easily uncover) lies in what it leaves out. None of the main protagonists has children, nor elderly relatives needing care. None is disabled nor has any special medical needs. None of them is ever ill or injured to the point of needing hospital care. The book doesn’t recognise the existence of people who might temporarily or permanently need help to function in society, and so does not acknowledge any moral obligation on government to care for them.
It’s been pretty clear to me that something like last week’s “fiscal statement” would be tried almost as soon as any one of the Britannia Unchained authors got to be PM. They are true believers, convinced they are right and everyone else is wrong.
I suspect they genuinely expected that the fiscal statement would be met with acclamation. And in some parts of the press they did get that acclamation. For instance, in the Telegraph last Friday Allister Heath gushed “This was the best Budget I have ever heard a British Chancellor deliver, by a massive margin. The tax cuts were so huge and bold, the language so extraordinary, that at times, listening to Kwasi Kwarteng, I had to pinch myself to make sure I wasn’t dreaming, that I hadn’t been transported to a distant land that actually believed in the economics of Milton Friedman and FA Hayek….”
I suspect that they still believe everyone who disagrees with them is wrong and given enough time they will be justified by events. So they are going to continue on this path. Unless and until they are stopped we are going to have repeated idiotic announcements from the government that spook the markets, each followed by the Bank of England coming in and sweeping up the mess and calming things down again.
What was that phrase you use to describe this kind of situation?
Theresa was off the mark because her rector father sent her upstairs each night so she could get study to get to oxbridge instead of getting out with pals. She gave us an unasked for diamond hard brexit to save the conservative party, with less thought for the country.
Not sure how Liz grew up so gawky, but she has seen the light. She longs for our accolades once we have seen it too. And if we object now, it is because we are too dull; only a matter of time until we come round and believe. Truly believe.
System must change. We don’t need this (yet) again.
That would be the Ayn Rand who collected social security and Medicare, after years spent opposing benefit programs
Rank hypocrisy is always one of the defining qualities of these people…
Your analysis rings true. Truss & Kwarteng want to send the UK on an untested economic experiment. No one voted for this. They have no mandate for this. Truss & Kwarteng have a mad belief that the British worker is to blame for the “poor productivity” they claim we have in the UK. Nothing could be further from the truth. Many companies are as efficient as those in other parts of the world. The key problem in the UK is Governments such as Truss & Kwarteng, who’s focus is on mad-cap change. What we actually need is coherent policy and slow but steady improvement in the operating environment for industry. Boris Johnson said “fxck business” and this typifies the problem. You would not find such comments being made in Germany. Truss & Kwarteng would not be permitted to introduce such a “mini-budget” in Germany. It simply would not happen. The UK desperately needs such mad-cap thinking to be removed from UK politics.
Roosevelt’s New Deal was quite experimental, but the approach was, “Try this. If it doesn’t work, we’ll try something else.”
Truss and Kwarteng aren’t treating this as an experiment. They “know” it will work. That’s how fantasists and fanatics think. Because they “know” it will work they will keep doubling down on it despite clear evidence of the damage it is doing and will continue to do.
I agree – this is not an experiment for them, it is an implementation.
Shorters do not care whether the Constitution is written or not.
They will have made easy money on Monday morning and will be back soon for more. They smell weakness.
Tonight nothing has been resolved.
I agree with this. Easy money breeds greed and contempt for those being exploited.
This is the most fantastical of places, the most far removed from reality. This is borisbrexitland.
I fear the situation is very serious. Until now the UK had been indulged with some ‘benefit of the doubt’ regarding economic competence. There is now no benefit of the doubt, it is clear to the entire market and to governments that the UK government has lost the plot. Indulgence has stopped. That will make life much more difficult.
To quote from the FT today:- ‘Vítor Constâncio, a former vice-president of the European Central Bank. “It’s delusional and underlines the cautionary tale that Brexit has represented, which is that going away from the European centre has been bad for the UK’.
“The pound is no longer an internationally meaningful currency — it’s amazing.”
The difficulty is that we have relied on The Market without doing anything to help The Market. Because the useful things government could and should have been doing are politically painful. Housing, industry, infrastructure and dare I say law. Now chicken have come home to roost at a very inconvenient time.
Three of Kipling’s serving men have given their answers but we are missing What, How and Where.
I feel a need to add that not only do they have an unreal & very dangerous ideology but in common with all extremists (be they from the left, right, or religious persuasion) they believe they ‘know the truth’ and so the rules that apply to all others do not apply to them.
Their word is meaningless – look at how Frost openly admits he (& with the cabinet behind him) signed the EU-UK WA which includes the NIP but right from the get-go had zero intention of ever honouring what they signed and Parliament ratified and what is now UK law & international law, and the NIP is but one example of this lawlessness.
I think this is what has spooked the markets & foreign governments.
Norman Dixon in the great work “On the Psychology of Military Incompetence” wrote of generals who led their armies into historical disasters because they were psychologically incapable of recognising and dealing with the real world and how it was changing in real time.
Dixon blamed years of conditioning in a closed environment where what was valued most was obediences and appearance (especially “Bull”).
With Truss and Kwarteng we have something very similar: an inability to perceive or react to real events brought on by years of conditioning in an environment where what is valued most is the ability to bat away questions without answering them and (since Brexit) ideological purity.
Truss and Kwarteng have lived by the ideology of the “free market”: it looks as if they will die by it too.
“Not in Kansas anymore” reminds me of the failed plan in Kansas to grow the economy and raise revenue in that state, by cutting taxes.
https://www.npr.org/sections/money/2017/01/11/509378842/episode-577-the-kansas-experiment
In a sense, Kansas is exactly where we now are.
One of the symptoms of “fantasy government” is that the fantasists disappear so far down the rabbit hole of their own ideas, they become unable to see reality, even when it dramatically intrudes, and instead re-frame reality as a failure of others to see it their way.
The latest exercise in financial self-harm is but one in a long pattern of identifying : (i) the problem as being, not the problem itself but, other people (the EU, people who voted Remain, the US, the IMF et al) failing to see we are right; and, (ii) the solution as other people just have to come round to our way of thinking.
Enough canards to fill a Tory MP’s duck island have been floated by the Government and its proxies to explain why the volatility in UK money and bond markets since Friday were not caused by the mini-budget on Friday.
The prosaic fact is that the ‘markets’ rarely, if ever, have a hive mind. There are thus, likely, many reasons, behind it. However, what is plain is that Sterling fell against the Dollar by more than other currencies over the same period and bond yields (until the Bank’s intervention) rose by more than other currencies. The UK was, and is, an outlier since the ‘mini-budget’ was announced. Thus placing it all at the feet of “Putin’s war” is nonsense.
There is plainly a fear in the markets that the UK is fundamentally unserious about controlling inflation. There are a number of reasons for this: (i) the political upheaval since the start of summer has meant no one, least of all the Bank of England, has known what the Government’s economic policy is, hence the Bank has been over-cautious in raising short-term rates; (ii) the Government supressed an OBR report at the time of the mini-budget and initially only offered an OBR report by the end of the year and a new fiscal plan “in the next few months”; (iii) there has been a caginess about how the energy price cap would be funded or what it would cost; and, (iv) the tax cuts were more extensive than trailed.
What the markets saw was a Government, down in the polls, bringing a giveaway budget to buy electoral votes at the next GE with apparently no regard for the medium term financial cost: i.e. 1988 Budget redux.
Those fears may have been unfair but they weren’t unreal. Occam’s razor, and common sense, tell us this was what sent the markets into freefall.
As you note, this lead to the start of a buyers’ strike in gilts and forced selling by defined benefits pension schemes to cover collateral calls. The existential threat to pension funds forced the Bank of England (underwritten by the Treasury) to stage an unprecedented intervention to artificially supress the yields on long dated gilts (by buying them).
In simple terms, it forced the Bank of England to temporarily pull in an inflationary direction at the precise time that it wants to, and the market says it should be, pushing in the opposite direction (i.e. down on inflation by selling gilts on its books).
Throughout all this mayhem, the Government’s inclination is to say “crisis, what crisis?”. Ben Riley-Smith, of the Daily Telegraph, has reported that on Tuesday the Chancellor was telling Tory MP’s that the “markets have been volatile…but they’re settling down now”. That is the day before the Bank of England had to spend £65bn on buying gilts to save the defined benefit pension funds.
The Chief Secretary was at it again today, telling Nick Ferrari on LBC that the “markets have settled”.
Anyone with even a modicum of expertise will tell you that the markets remain febrile and we will be unable to say one way or the other until, at least, the Bank of England ceases their massive and unprecedented intervention.
Only by being unable to see reality could any Government minister place the bulk of the blame for this week anywhere else than at the Government’s door or, for that matter, think that the crisis is over.
I see Truss is ignoring the advice that when in a hole you should stop digging. Trying to characterise the problem on the energy price support (which didn’t spook the market when announced) is desparate, when the issue is the unfunded new tax cuts. Presumably she intends to fund them with huge public spending cuts but daren’t announce that plan yet.
“I’m not sorry and we aren’t changing course. We’ll explain everything in two months time” is not going to calm the financial markets or restore pension fund losses.
I thought Osborne was rash trying to impose austerity while we were only just beginning to recover from recession, and it did choke that recovery. Imposing austerity when we’ve only just started a recession is utter madness. It will only make such a recession deeper.
Britannia Unchained was published 12 years ago, Mary Elizabeth Truss has been a minister for 12 years and the decisions she has made are a matter of public record. It is both astonishing and predictable that our esteemed “national” journalists are waking up only now to who she is.
To quote Maya Angelou again: –
“When someone shows you who they are, believe them the first time”
See also Alexander Boris de Pfeffel Johnson
Your blog and the ensuing contributions are superb!
John Bull (garius) described this on Twitter the other day as Cargo Cult Conservatism: https://twitter.com/garius/status/1573281147152437248?s=20&t=KWdwZT74crCAg97qVwcy5Q
Definitely not Kansas but it could be we’re on the way to Purgatory, where we need to cleanse the country of this economic madness and return to a sane orthodoxy.