From London
The pound sterling is still on the slide that began the budget presented on Friday in parliament by the new government of Liz Truss and is getting closer to parity with the dollar. On Asian Monday (British Sunday night) the value of the British currency fell 5% and did not wake up much better in London in what is anticipated to be a vertigo week. In the City and the media they propose an iron alternative: either the Central Bank announces an emergency increase in interest rates or there is a currency run.
The ultra-neoliberal budget presented by Finance Minister Kwasi Kwarteng is terrorizing the very people who benefit most: the rich and the markets. The pound fell to its lowest level in 37 years on Friday. Today with the blow that the Asian markets gave it, it collapsed to the underground of 1971 against the dollar and September 2020 against the euro.
The budget contemplates a tax reduction of 45 billion pounds concentrated on the rich and corporations, to which is added the 150 billion in assistance to companies and households against the tariff that is coming in October for gas and electricity . With public debt at 100% of GDP and the country in recession, it is clear that the accounts do not close: The only way to bridge the gap between a massive drop in tax revenue and a phenomenal increase in spending is to issue debt.
The tale of trickle down
Specialists calculate that this policy commits the government to issuing debt for 411 billion pounds in the next five years at a time when public debt has jumped from 60% pre-pandemic to 100% of GDP.
The government’s argument is that this policy will get out of the current economic stagnation: the rich and companies would invest more, generating economic growth that will trickle down to the rest of society.
In a defiant interview with the BBC on Sunday, Minister Kwarteng finished scaring off the markets by announcing that there would be more tax cuts very soon. In Asia they listened to him and began to get rid of pounds and bonds.
The head of the firm Pepperstone, Chris Weston said Monday that the pound was the most fragile currency of the 10 developed countries that make up the financial G10. “Investors clearly believe that it is not sustainable to have a growth slump and a twin (…fiscal and trade…) deficit,” Weston noted. Deutsche Bank Chief Economist Sanjay Raja added that there was a real risk of a balance of payments crisis. “The price of loose fiscal policy became clear. A plan is going to be needed to put public finances in order,” Raya said.
This plan would require the government to reverse some budget measures, something that would border on political suicide. This morning Lizz Truss’s spokesman limited himself to saying that the government did not comment on events in the financial markets. Difficult for 10 Downing Street to maintain this lofty stance throughout the week. But not impossible.
Both the brand new prime minister and her finance minister have publicly supported the same policies since 2012. That year they published “Britannia unchained” (Liberate-unchain Great Britain) in which they proposed the same thing that they executed in these first three weeks. Impervious to criticism Truss said it was time to stop talking about redistribution and start talking about growth. “It seems fair to me that we lower taxes on the rich because they are the ones who pay the most. With our plan we will grow again”he pointed defiantly.
kicking in the grave
Queen Elizabeth II, who passed away on September 8, two days after Truss’s inauguration, must be kicking in her grave. Banknotes and coins bear his effigy. Today that effigy has been devalued as never before.
When Elizabeth II was crowned in 1953, the pound was worth more than two dollars. In the three following decades she maintained that equivalence with ups and downs. In 1991, in full Thatcherism, it had fallen to 1.77 dollars per pound. In this century, the average value was between 1.5 and 1.3 with a tendency to a continuous, but moderate drop. The day of his passing was 1.15. On Friday he fell to $1.09 and today he hovered around $1.03. The forecast is as clear as English skies in winter: stormy and to the downside.
It is not about a monarchical issue or a phallic fetishism around currency: the problem is one of economic structure. The UK has a chronic trade deficit which it makes up for with gains in the services sector, especially finance and insurance.
The industry semi-evaporated in the 1980s with Thatcherism.
An unstable pound chaotizes the planning of companies that import and export. With a weak currency, the trade deficit will have a stronger impact on the prices that consumers pay for some essential products. Of course in energy with the cost associated with transport, but also in food: the United Kingdom imports half of the food it consumes.