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19 April 2024

Liz Truss is right about the Deep State

Among the ridiculous complaints, excuses and conspiracies, the ex-prime minister makes one important point.

By Will Dunn

“There is no time for finger-pointing,” Liz Truss declares in the introduction to her score-settling autobiographical blame-fest, Ten Years To Save My Career, before rolling up her sleeves and using both hands to aim her furious digits at everyone who has failed her, for 320 pages.

The book is packed with disturbing revelations about the Deep State. The “legal establishment” sought to humiliate her through the brutal tactic of “not clapping loudly enough” when she entered the room. Civil servants forced her to book her own hair appointments and to send her diary secretary out for cough medicine. A round of media interviews was arranged at the top of the Empire State Building despite her being “not that great with heights”. Teachers (Deep Staters, every one of them) warped young minds by “teaching that there are multiple genders”, in clear defiance of the one true gender that all normal people believe in.

Worst of all were the officials of the Treasury and the Bank of England, who are “global left in outlook and pro-China”. After the mini-Budget of September 2022, Truss’s plan for economic growth was stifled by “a sustained whispering campaign by the economic establishment”, which nearly crashed the UK economy and then ousted her from Downing Street.

Much as I enjoy the image of Andrew Bailey creeping through the night to mutter into the ears of Canadian asset managers “Don’t buy any gilts tomorrow, I’m doing a Marxist coup, I don’t think that really happened. But I do think it is reasonable for Truss to complain about the power that monetary policy has assumed over politics.

Truss spends a good chunk of Ten Years to Rebuild My Credibility proudly explaining how mean she was to officials as a minister. What she doesn’t seem to realise is that this made her life a lot more difficult. Obviously, there would have been people in Downing Street capable of booking a hair appointment or checking if you don’t like heights. However, they’re not going to offer to do that if you’re rude to them all the time.

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Similarly, I imagine there were people who could have talked Truss and Kwarteng through the likely market implications of taking government borrowing to £190bn in a single year (money raised by selling UK government bonds, known as gilts), two days after the Bank of England had voted to sell off £80bn of its gilts in the same year. At the beginning of August 2022, the yield (borrowing cost) on a ten-year gilt was 1.8 per cent; by the time Kwarteng began his fateful “mini-Budget” speech it was 3.3 per cent. A good adviser might have suggested having a chat with the Bank about that.

Similarly, no one warned Truss that when the yields spiked after Kwarteng’s speech, the liability-driven investment (LDI) strategies used by pension funds might start to incur margin calls for hundreds of millions of pounds. “I was astonished to discover no one in the Treasury or the Bank of England had flagged it as a problem,” she writes, before admitting: “I hadn’t heard of LDIs… We struggled both to understand and to explain what was happening.” Truss continues to struggle with this issue, and blames Bank officials for not having regulated these products. (The Bank had stress-tested LDI funds in 2018, and measured how they scrambled for liquidity in 2020.)

What Truss gets right in Ten Years to Monetise My Contrarian Persona is that the reason pension funds started playing with leveraged derivatives in the first place was that the monetary policy of the previous decade – the quantitative easing (QE) era – had made it hard for them to meet their liabilities using only the very safe investments that made up most of their assets. The age of cheap money forced them to take on a new kind of risk.

Truss accuses the Bank of creating a “period of cheap money that had anaesthetised the country”, and that seems like a fair accusation to me. What she won’t describe is what the country was being anaesthetised from. This was, of course, the pain of austerity, which inflicted huge damage to the economy by radically reducing the spending of its largest participant, the government. In 2013, George Osborne explicitly stated that “active monetary policy” was now in charge of providing growth. This was the point that power was handed to unelected technocrats, and it was done so that the Conservative Party could have an easier time in government.

QE also caused deep inequality, through asset inflation, and an increasing frustration with the political class that was instrumental in the Brexit vote and the political turmoil that followed. Without it, Liz Truss probably wouldn’t have been given a go at being prime minister. Her successor, Rishi Sunak, openly celebrated the dominance of gilt prices over democracy, jovially thanking “the UK bond markets” for making him PM in a speech a few days after being elected (by just over 100 people in a leadership contest in which he was unopposed). 

It is not a conspiracy theory to say that monetary policy has become overmighty and fiscal policy is at the mercy of economic forecasts, or to question the unelected officials who wielded this power, and in some cases continue to do so (Mark Carney, who as the Bank of England’s governor helped to bank-roll Osborne’s vandalism, has a seat on Labour’s economic task force). The phrase “deep state” is deeply silly but it is worth asking why the former prime minister believes in it – and to what extent she is right.

[See also: Does Liz Truss know she’s a joke?]

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