BY STEWART SLATER
Different societies have developed different ways of dealing with failed leaders. The ancient Athenians used ostracism, exiling the offender from the city for 10 years. The Romans preferred their fallen heroes to make a more permanent exit, as did the Japanese (the novelist Yukio Mishima committed seppuku in 1970 after the inevitable failure of his laughably inept coup attempt). Gentler societies have suggested a stretch in a monastery, giving the fallen hero time to ponder the failings of their immortal soul.
The British approach combines non-lethality with sadism. A losing PM is immediately made homeless and then forced, every year for the rest of their lives, to appear on a cold November morning at the Cenotaph, to remind the viewing public of their general hopelessness.
Confronted with a future where the nation pointing at its TV and crying, “Oh, it’s her. She was awful! I don’t know how she can show her face after what she did. Shortest ruling PM, you know.” becomes an annual ritual, it is, perhaps, no surprise that Liz Truss has chosen to “set the record straight”. It is perhaps equally unsurprising that most figures in politics and the media are having none of it. Rather than being brought down by that first refuge of a conspiracy theorist, the “deep state” , she was, as George Osborne put it, done in by “the free market”.
This has, of course, become the first draft of history’s judgement on the short-lived Truss imperium. She announced her policies, markets freaked out because they were wrong, bond yields spiked and sterling collapsed and she had to reverse course. In one of life’s little ironies, those who hate markets decided they were always right, and those who love them argued they were sometimes wrong.
Interpreting markets is an art not a science, but with that caveat, let us turn our minds back to that period. The case as stated by Truss’s opponents is certainly true as a bald statement of the facts, but it is incomplete.
We know, for example, that market moves were magnified by derivative positions undertaken by the pension fund sector (so called LDIs). As markets moved, these investors became forced sellers in an illiquid market which in turn sucked in further selling. It is difficult, however, to work out how much of the move was down to investors’ “reasoned” view on Truss’s policies and how much was this more mechanical, “compelled” reaction. Because Britain was unique in implementing new policies and seeing a derivatives crisis at the same time, international comparisons are of little value.
Equally, the crash in sterling took place early on Monday morning Tokyo time, a period where there is little interest in trading the pound against the dollar, increasing the likelihood of outsized moves. To put it simply, if a wave of selling hits the market, there is just not enough buying in that location to soak up the supply. Had a similar amount of sterling been dropped on the market during London hours, the move in the exchange rate would, almost certainly, have been more restrained.
Even if we accept, however, the view that the behaviour of the markets reflected investors’ “true and fair” view of Truss’s policies and nothing else, those who take that position implicitly argue that this view would not have changed. Markets analysed her announcements, came to a decision, and that conclusion was right and would remain so for ever.
We might forgive our leftier chums, who tend to regard markets with the disdain of a Victorian matron who has found a mouse in her soup, but this is a strange argument for supposedly market-loving right-wingers.
At any point, the price of an asset represents the consensus view of market participants of the value of that asset. That view can, and does, however change. If markets never changed their minds, if the consensus never altered, prices would never change because everyone would believe that the value of the asset was the same and have no reason to trade. The only reason people work in the financial markets is because they believe, rightly or wrongly, that they can identify times where the consensus is wrong, or, to put it another way, when the consensus estimate of the value of an asset is likely to change in a predictable direction.
If markets can change their minds, then, the question becomes whether, in this case, they would have done so. The answer to that partly depends on how we view the cause of the dislocation. If the structural issues in the pension sector were primarily to blame, we might expect a reasonably rapid return to “normality”. Those of a certain age will remember “Black Monday” in 1987, when markets crashed, partly due to the fashionable financial engineering tactic of “portfolio insurance” which, as in the more recent crisis, turned investors into forced sellers. What is less frequently recalled, however, is that the markets ended the year higher than they had been the day before the crash. The structural kinks were worked out and normality quickly returned.
But, even if we minimise the importance of the markets’ structure to its movements, there are reasons for believing that they would have bounced back to a greater or lesser extent. The decline is blamed on three different factors which combined to break investors’ faith: the energy package, the unfunded tax cuts and the lack of an OBR forecast. Although it caused little dislocation at the time, the former was thought to be by far the largest of the three, with a price tag estimated at up to £200bn. However, this was based on gas prices at the time. If they fell, so would the cost of the intervention. And lo, this has come to pass. In September, Reuters estimated the cost of the package as £60bn for six months, but due in part to the warm winter, that has fallen to £25bn according to the latest figures from the House of Commons library. Through no effort of its own, the government quite quickly acquired quite a lot of fiscal headroom.
Equally, the tax-cuts announced in the mini-budget were meant, partially, to be funded by the supply-side reforms Truss had long championed. But this brought two problems. First, much of the package would require legislation, so the costs of the tax-cuts would be incurred before the increased revenues from the reforms kicked in. Secondly, modelling the effects of such measures has always been hard, with a broad range of possible outcomes. As the IFS noted at the time, scrapping the 45p rate of tax might cost £6bn a year, it might cost £2bn a year (as the government claimed), it might “plausibly cost nothing at all”. It was extremely hard at the time for investors to work out how much the government would be forced to borrow and, in a safety-first environment, that led to only one response. Over time, however, there would be greater clarity about the impact of reforms and, therefore, of the fiscal position. As Eric Morecambe might have done, Truss may have had all the right policies, but she did not necessarily release them in the right order.
As for the OBR, this has always struck me as an odd concern. Not only did the government yield to pressure to commission a forecast pretty quickly, but investment banks pay millions for highly trained economists to predict the vagaries of the global economy and they are, to be gentle, certainly no less accurate than the government bean-counters, whose prognostications often seem to underperform a monkey with an ouija board. Not that they are alone in this. A Bloomberg study of IMF 12-month forecasts found they were within the margin of error only 6% of the time. Freaking out because a group which is usually wrong has not released a number which is likely to be wrong may be many things, but rational is not one of them. If we cannot say that markets are rational at any given point, then we can certainly argue that they tend to rationality over time.
There are, then, reasons to believe that markets would have had cause to reassess the situation as time went on, but this does not absolve Truss of responsibility. The warmer weather, and its impact on the gas market, was nothing to do with her. Had she stayed in office, she would have been lucky, not right (although, as Napoleon believed, that’s not nothing). Nor do her protestations of ignorance hold much water. It is well-attested that, at a pre-victory summit at Chevening, her advisers told her she had a maximum budget of £60bn for her interventions before markets panicked. Launching a package thought to cost up to £200bn was wilful, not wise.
But if markets panicked, so too did Tory MPs, with many threatening to rebel over the abolition of the 45p rate. The leadership election had been, as I wrote at the time, a battle between the officers and the ideologues. Once the latter had won, the former seemed reluctant to play the team game and row in behind their new leader. They seemed to prefer to sit back, waiting for her to fail rather than help her succeed. If Truss has a point about the lack of support she received, once again however, she deserves some of the blame, having excluded her opponents from the Cabinet.
Having launched their coup, though, the officers seem to have inherited little but ruins, with the party languishing 20-odd points behind in the polls. Perhaps they would have been better advised to suck it up as the only way out was through. Rather than return to the unstable stability which has characterised the past decades, with serious “professionals” overseeing minimal growth punctuated by economic and political blow-ups, better to give Truss’s maverick stable instability of higher volatility but quicker clearing a go in an effort to ramp up the growth rate. Unless your personal idea of utopia is a nuclear armed retirement home, we do need to do something.
In classical mythology, Cassandra’s curse was to be right but to be disbelieved. Liz Truss may be attempting to set herself up as a similar tragic heroine, but as she spends those cold November mornings at the Cenotaph, she will have to reckon with the fact that she is at least partly to blame.
Stewart Slater works in Finance. He invites you to join him at his website.