When the fall of the towers seems like a bad dream, we will still suffer the impact on our living standards

<em>Terror in America</em>

David Hume's precept that it is reasonable to prefer the destruction of the whole world to the scratching of my finger seems to apply when discussing the economic consequences of a grotesque act of terror or war.

With so many lives lost, it appears callous to assess the impact on the oil price, stocks and consumer confidence. But the truth is that the economic effects of the atrocities in New York and Washington will be severe. And the almost inevitable economic slowdown will have a direct impact on most people across the world, in a way that the carnage and loss of life will not. When the collapse of those towers seems like a bad dream, we will still be coping with the impact on savings, jobs and living standards.

The terrorists have acted when economies and markets were particularly vulnerable. For the first time since the war, a downturn is taking place in the US, the Far East and Europe at the same time (which is not wonderful propaganda for the most ardent proponents of globalisation). And, for good measure, there have been growing concerns about the health of emerging economies, as two of them - Turkey and Argentina - have been engulfed by debt.

Why is it likely to get worse? Well, the transmission mechanism - the linkage - goes something like this. There is an assumption that the attacks were in some way connected to the Middle East. So the oil price has soared. From LA to Nairobi, that increases the cost of doing business. And it is particularly damaging to Japan, a heavy importer of oil whose economy is the most fragile of all the developed economies. Years of irresponsible lending and dodgy financial engineering by Japan's enormous banks have created the risk of a financial crisis of mind-boggling proportions.

Meanwhile, the US economy has been kept afloat this year only by the propensity of its consumers to spend. This has been a remarkable feat, since their savings have been hit by a stock market that has been falling for a year. There has also been an increase in job insecurity as technology firms announced substantial lay-offs.

There are now holes in this bucket. Even before the aeroplane strikes, there were signs of diminishing retail spending in the US. But this new blow to their confidence, the instinct to batten down the hatches, could lead to a significant drop in consumer spending.

Or, at least, that has already been the calculation of stock markets, which have plummeted wherever they were open. The unprecedented decision of the US markets to suspend trading heightened the anxiety in London, Frankfurt and Tokyo. And a return of stability to the markets will not be rapid, given that a number of important financial firms were - literally - badly damaged by the collapse of the World Trade Center.

As I write, it is unclear whether the affected firms have appro- priate emergency systems to cope with the loss of vital records on trades and financial exposure. The robustness of the world financial system is being tested.

In the meantime, the fear becomes self-feeding, self-perpetuating. As stock markets fall, the value of individuals' long-term savings also drops - and that puts pressure on those individuals to save more and spend less (which in turn damages the prospects of those businesses that depend on their spending, and so on).

Meanwhile, there is a whole series of businesses that are in the front line of commercial victims. These would include airlines such as British Airways (unable to offer services on its most profitable US routes and likely to see a sustained fall in passenger numbers for some months) and insurance companies with exposure to Manhattan.

We were already paying a steep price for the biggest mood swing in corporate and financial history. Just two years ago, banks, investors and companies were in the grips of euphoria about the potential of the internet to raise productivity. They invested billions in the relevant technologies and in the smallish number of people who claimed (falsely, in many cases) to understand them.

These same institutions have now recognised that they got carried away and invested too much. Euphoria has been replaced by self-flagellation. Non-essential spending - orders for capital equipment, advertising, recruitment - is being deferred or eliminated.

And, to compound it all, banks are getting antsy about whether they will get back the trillions they lent during the bubble of the late 1990s, especially the sizeable portion that went to telecommunications and technology businesses.

So the economic background was bad; and it now looks a lot worse. Inevitably, there has been emergency contact over the past few days between central bankers and finance ministers. I have little doubt that interest rates will be cut across the world - and sooner rather than later.

However, it is almost impossible to make a rational prediction about where stock markets will settle. Based on the analysis we do at QUEST(TM), UK and European shares are, in general, good value now. But prices may easily overshoot on the way down, just as they rose far too high during the late 1990s boom. An analyst whom I respect believes that the FTSE 100 will be half its current level within a year. He is not going to publish this prediction because it is of no use to investors - if you tell people their world is ending, their response will be either denial or hysteria; neither is helpful.

Meanwhile, a senior international bank regulator inquired solicitously this week whether I am long on cash. If we were all to heed his advice and liquidate our assets, the past ten fat years would be superseded by many exceedingly lean ones.

Robert Peston is editorial director of QUEST(TM); http://www.csquest.com; e-mail: rpeston@csquest.com

This article first appeared in the 17 September 2001 issue of the New Statesman, The end of the open society?

David Young
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The Tories are the zombie party: with an ageing, falling membership, still they stagger on to victory

One Labour MP in Brighton spotted a baby in a red Babygro and said to me: “There’s our next [Labour] prime minister.”

All football clubs have “ultras” – and, increasingly, political parties do, too: although, in the case of political parties, their loudest and angriest supporters are mostly found on the internet. The SNP got there first: in the early days of email, journalists at the Scotsman used to receive bilious missives complaining about its coverage – or, on occasion, lack of coverage – of what the Scottish National Party was up to. The rest soon followed, with Ukip, the Labour Party and even the crushed Liberal Democrats now boasting a furious electronic horde.

The exception is the Conservative Party. Britain’s table-topping team might have its first majority in 18 years and is widely expected in Westminster to remain in power for another decade. But it doesn’t have any fans. The party’s conference in Manchester, like Labour’s in Brighton, will be full to bursting. But where the Labour shindig is chock-full of members, trade unionists and hangers-on from the charitable sector, the Conservative gathering is a more corporate affair: at the fringes I attended last year, lobbyists outnumbered members by four to one. At one, the journalist Peter Oborne demanded to know how many people in the room were party members. It was standing room only – but just four people put their hands up.

During Grant Shapps’s stint at Conservative headquarters, serious attempts were made to revive membership. Shapps, a figure who is underrated because of his online blunders, and his co-chair Andrew Feldman were able to reverse some of the decline, but they were running just to stand still. Some of the biggest increases in membership came in urban centres where the Tories are not in contention to win a seat.

All this made the 2015 election win the triumph of a husk. A party with a membership in long-term and perhaps irreversible decline, which in many seats had no activists at all, delivered crushing defeats to its opponents across England and Wales.

Like José Mourinho’s sides, which, he once boasted, won “without the ball”, the Conservatives won without members. In Cumbria the party had no ground campaign and two paper candidates. But letters written by the Defence Secretary, Michael Fallon, were posted to every household where someone was employed making Trident submarines, warning that their jobs would be under threat under a Labour government. This helped the Tories come close to taking out both Labour MPs, John Woodcock in Barrow and Furness and Jamie Reed in Copeland. It was no small feat: Labour has held Barrow since 1992 and has won Copeland at every election it has fought.

The Tories have become the zombies of British politics: still moving though dead from the neck down. And not only moving, but thriving. One Labour MP in Brighton spotted a baby in a red Babygro and said to me: “There’s our next [Labour] prime minister.” His Conservative counterparts also believe that their rivals are out of power for at least a decade.

Yet there are more threats to the zombie Tories than commonly believed. The European referendum will cause endless trouble for their whips over the coming years. And for all there’s a spring in the Conservative step at the moment, the party has a majority of only 12 in the Commons. Parliamentary defeats could easily become commonplace. But now that Labour has elected Jeremy Corbyn – either a more consensual or a more chaotic leader than his predecessors, depending on your perspective – division within parties will become a feature, rather than a quirk, at Westminster. There will be “splits” aplenty on both sides of the House.

The bigger threat to Tory hegemony is the spending cuts to come, and the still vulnerable state of the British economy. In the last parliament, George Osborne’s cuts fell predominantly on the poorest and those working in the public sector. They were accompanied by an extravagant outlay to affluent retirees. As my colleague Helen Lewis wrote last week, over the next five years, cuts will fall on the sharp-elbowed middle classes, not just the vulnerable. Reductions in tax credits, so popular among voters in the abstract, may prove just as toxic as the poll tax and the abolition of the 10p bottom income-tax rate – both of which were popular until they were actually implemented.

Added to that, the British economy has what the economist Stephen King calls “the Titanic problem”: a surplus of icebergs, a deficit of lifeboats. Many of the levers used by Gordon Brown and Mervyn King in the last recession are not available to David Cameron and the chief of the Bank of England, Mark Carney: debt-funded fiscal stimulus is off the table because the public finances are already in the red. Interest rates are already at rock bottom.

Yet against that grim backdrop, the Conservatives retain the two trump cards that allowed them to win in May: questions about Labour’s economic competence, and the personal allure of David Cameron. The public is still convinced that the cuts are the result of “the mess” left by Labour, however unfair that charge may be. If a second crisis strikes, it could still be the Tories who feel the benefit, if they can convince voters that the poor state of the finances is still the result of New Labour excess rather than Cameroon failure.

As for Cameron, in 2015 it was his lead over Ed Miliband as Britons’ preferred prime minister that helped the Conservatives over the line. This time, it is his withdrawal from politics which could hand the Tories a victory even if the economy tanks or cuts become widely unpopular. He could absorb the hatred for the failures and the U-turns, and then hand over to a fresher face. Nicky Morgan or a Sajid Javid, say, could yet repeat John Major’s trick in 1992, breathing life into a seemingly doomed Conservative project. For Labour, the Tory zombie remains frustratingly lively. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.

This article first appeared in the 01 October 2015 issue of the New Statesman, The Tory tide