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26 September 2022

From the US, the UK’s economic policy appears senseless

In America the view that sterling is now an emerging market currency is not a meme but a widely-held sentiment.

By Ed Price

Last Friday (23 September) I spent the day trying to explain to my American friends why the UK had embarked on the biggest tax cuts since 1972. 

What was there to say? As an Englishman in New York, I often find myself elucidating our various eccentricities. A lot of the time it’s great. You know the drill. Yes, we like colourful socks. No, we don’t all play cricket. This time, however, was not so fun. In the UK, inflation is at 9.9 per cent. The government is also borrowing £150bn to freeze household energy bills. That sort of borrowing – a new windfall tax on energy firms was another option – is also inflationary. Thus, abolishing the top rate of tax for the highest earners (£150,000+), as Kwasi Kwarteng, the Chancellor, did in his mini-Budget, doesn’t make sense. Inflation is the real worry now.

Don’t take my word for it. Take sterling’s. The pound is teetering just above the dollar. And take the Bank of England’s. It has increased interest rates from just 0.5 per cent in February to 2.25 per cent now. Presumably, in coming weeks, the two will grow even further apart. Sterling has further to fall. Rates, further to rise.

Larry Summers, a prominent American economist, sniffs disaster: “Britain will be remembered for having pursued the worst macroeconomic policies of any major country in a long time.” Summers won international economics last year by predicting inflation in the US. His warnings are frequent, but serious. His track record? Robustly plausible.

In the morning I got on Bloomberg radio with Kriti Gupta and Paul Sweeney. Super smart people, and yet perplexed. At once, I found myself confessing that UK fiscal policy and UK monetary policy are now at odds. As per the above, the Bank of England has raised its rate. That means it’s worried about inflation. Very worried. Meanwhile, however, look at last week’s mini-Budget. That means the Treasury’s… not? Now, to be fair, the Conservative Party exists to cut taxes. No news there. But the Conservative Party also exists for fiscal responsibility, meaning for low inflation and a stable currency. Low inflation and a stable currency are, for want of a better word, good. All I could do was admit to the clash. My American hosts – steeped in markets and economy – were puzzled. Blinking and puzzled.

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And then there came the kicker. Paul wanted to discuss the pound’s precipitous slide (then at $1.09, now $1.07 as I write). In the world of economics, this is what we call no bueno. I suggested it means parity looms, or a condition in which one pound is worth one dollar. Kriti and Paul, with all good kindness, went further and explained the pound was now an emerging market currency. This, I resisted. It sounded like a Twitter meme! But they were only expressing a widely-held sentiment. To American eyes, UK economic policy appears incoherent. Forget Fifth Avenue this Crimbo, folks. It might as well be on the moon.

Still, nil desperandum. The dollar is independently strong. The war in Ukraine, independently disruptive. And sterling, adjusting to a post-Brexit reality, was always going to fall against other major currencies. There is no way to leave the largest trading bloc in the world and not have capital markets wonder aloud about the health of our economy. Sterling needs a new narrative. The old one – a combination of European market size and British ingenuity – is gone.

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Happily, there are new narratives to be had. There are possible futures in which a weaker pound is no deterrent to inward investment and indeed boosts exports. There are futures in which a sterling smile emerges (people buying the pound whatever the headlines). And there are futures in which the Americans and others think highly of us again. As stated, nil desperandum. Life is long and life is strange.

Right now though, as an Englishman abroad, it feels like it’s trending stranger every day.

[See also: Kwarteng hands FTSE bosses a £34m tax break]