On Wednesday, Hurricane Ian bore down on Florida’s Gulf Coast, closing schools and airports, prompting evacuations and adding to the problems of the hardworking people of the Sunshine State.
At the same time, a different kind of hurricane was engulfing Britain, this one with a cone of impact that stretched all around the world.
Precisely why the inexperienced new British prime minister, Liz Truss, and her inexperienced chancellor, Kwasi Kwarteng, have suddenly caused such a mess takes some explanation. On the face of it, all they did was take out a pair of jumper cables hoping to shock the economy into growth. Among other things, this meant cutting the top rate of personal taxation.
But it’s not so simple. One problem is that the economy is operating with what economists call supply-side constraints, a fancy way of saying there is not enough stuff to meet demand. That’s an inflationary hangover from COVID-19 and its infamous bottlenecks, not to mention the energy-related stresses caused by Russian leader Vladimir Putin’s war in Ukraine. The second, simply put, is that this new and incautious government is doing what no other wealthy nation is currently doing. It has stuck out its neck.
That neck is being chopped off not by the new King Charles III, but by the equivalent of the Federal Reserve, the Bank of England. And by the International Monetary Fund, which, in a rare direct intervention, pointed out that such an apparently unfunded tax cut was not recommended. To say the least.
And then, of course, there is the matter of the pound, which has been pounded by all the above, approaching parity with the dollar on Wednesday. That’s great for Americans vacationing in London but lousy for British businesses that buy their raw materials priced in dollars, as most of them do.
All of this is causing U.K. interest rates to rise rapidly. So what, Americans might say, the same thing is happening here.
But the crucial difference is that most Americans have 30-year-fixed mortgages. The rise in interest rates does not immediately cause most people’s payment to rise. What the increases do in the short term is disincentivize people to sell their homes, which holds inventory and prevents a price collapse. Most Brits, though, have floating, adjustable mortgages, meaning that the new rates kick in fast, and just as European energy prices are going through the roof, too. That’s not a good mix; on the contrary, it’s a world of hurt.
What lessons can the U.S. glean from this British mess?
No. 1 is that the age of deficit spending with relative impunity, a favorite of both the Trump and Biden administrations, is over. Governments will have to live within their means for the foreseeable future.
No. 2 is that there is an underappreciated downside to the Fed’s aggressive interest rate hikes, which is causing huge strength in the dollar but agony for the currencies of several other nations. In the end, this stoking of massive instability is not good for anyone.
No. 3 is yet another reminder of the interconnectivity of the global economy and the perils of going against the flow.
Finally, it’s a reminder of just how badly the Biden administration and its enablers missed the boat on attacking inflation when it was still more easily tackled.
If Truss persists, this might be one of the shortest and most damaging prime ministerships on record. The honeymoon ended, and the hurricane started, right after she shook hands with the late queen.
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