There is a scene in Withnail & I in which the two protagonists, having failed to procure food or fuel for the Lake District cottage they are spending the weekend in, accost a local farmer in the pouring rain. “You’ve got to help us,” they wail. “We’ve gone on holiday by mistake.”
Liz Truss and Kwasi Kwarteng are currently starring in a live-action remake. To recap, yesterday (26 September) sterling fell to its lowest rate against the dollar since records began in 1971, while the cost of borrowing – which is how they will finance their plans – suffered one of the biggest rises since 1979. Having bumbled their way to Downing Street and failed to procure funding for their spending plans, the rain is pouring. They can’t find any fuel, and they’ve crashed sterling by mistake.
But one intriguing theory doing the rounds indicates that yesterday’s market turmoil was actually part of a plan. The theory goes that Truss and Kwarteng had always expected hedge fund managers, whose income largely derives from “shorting” – betting against – shares, commodities or currencies, to react to the mini-budget by entering large short positions against the pound, thus destabilising the currency and causing enough chaos to force the Bank of England to push up interest rates in order to calm the markets.
There may be some truth to it – as the Spectator’s Kate Andrews insisted, “The Truss government wants interest rates to rise faster. It’s a key part of its new economic strategy.” And sure enough, the economists Truss has cited – Gerard Lyons, Patrick Minford and Julian Jessop – have all championed a higher-interest rate economy.
But a tweet from Richard Corbett, a former MEP (why is it always a former MEP?), went full conspiracy: he insisted that an “international banker friend” had told him hedge funds had “met up with #KwasiKwarteng 3 days before the announcement and they shorted Sterling big time”. To be clear: this would be market manipulation.
Why would people believe this? Is it more comforting to believe our government is corrupt than just straightforwardly incompetent? The frenzied reaction to yesterday’s market turmoil – which included panicked briefing against “fast and loose” hedge funds and a “shouting match” between Truss and Kwarteng – indicates that this wasn’t a plan, after all. They really did expect markets to react calmly to the £400bn of extra borrowing included in the Budget. That, or the Conservatives are now just so used to cheap debt, they didn’t think twice about racking it up.
The truth is, hedge fund managers would hardly have needed help from Truss’s inner circle to figure out what the market reaction to a raft of unfunded tax cuts would be. It wouldn’t have taken a leap of the imagination, as chunks of Friday’s plan were trailed in the media, to guess that the Chancellor’s conviction he could pay for the tax cuts entirely through a vibes-based plan for growth, might not be exactly what markets were hoping for. At that point, they would have entered short positions accordingly.
Meanwhile, reports suggest that far from hoping for market turmoil, the Conservatives have gone into full panic mode after yesterday’s market reaction. Sadly, the crash in sterling wasn’t part of a plan, dastardly or otherwise: whatever Truss and her team have done, it has been done entirely by accident.
[See also: Has the Bank of England lost control?]