Government Watch / Politics

Liz Truss’s Failure in U.K. is a Warning about the Future of the U.S. Economy

AMAC Exclusive – By Daniel Berman


Elizabeth Truss’s resignation on Thursday made her tenure the shortest of any Prime Minister in British history. At 44 days, it was less than half the length of the tenure of George Canning, who lasted 119 days – and he had the excuse of dying while in office. Her tale is one of hubris and tragedy. But it is also one about the power of the markets, the precariousness of the debt-based economic system Western governments have embraced, and the fate which threatens to befall anyone who challenges a status quo which is unsustainable in the long-run.

Truss entered office with high hopes, especially among free-market conservatives and advocates of the trans-Atlantic relationship, but found herself isolated a mere six weeks later. She had the lowest approval ratings in history, witnessed her party descend into physical infighting during a parliamentary vote, and faced the indignity of being lectured about economic policy by Joe Biden.

While Joe Biden might be taking a victory lap for calling her tax cuts a mistake, the weaknesses of the U.K. economy are merely much more advanced versions of the same imbalances which afflict most major Western countries, including the United States. What happened to Truss when she tried to confront them should stand as a warning to American policymakers who think they can indefinitely avoid hard choices over debt, or believe that the markets will allow them the freedom to choose anything other than rigid austerity.

There were legitimate reasons behind Truss’s decision to gamble on an aggressive pro-growth economic policy, just as there were reasons for the market reaction. The United Kingdom had not only underperformed its fellow G7 economies over the past decade, but when inflation was taken into account, wages and incomes had been almost entirely stagnant. Behind this lay almost non-existent productivity growth. British education was failing to train workers to use technology, while companies were declining to invest in the sort of infrastructure which would promote growth. Workers, buried under high tax rates and secure in a strong, if decaying welfare state, had little incentive to challenge the status quo beyond complaining about what everyone knew. At some point, someone had to do something.

Truss attempted to do something with a mixture of corporate and individual tax cuts, elimination of regulatory red tape, the removal of caps on banker bonuses, and support for fracking. The markets reacted negatively, with the Pound Sterling losing almost 8 percent of its value. The reason was ostensibly concern over “unfunded” tax cuts, but this was simplified into concern about tax cuts in general. In actuality, markets were likely concerned about the U.K.’s level of debts, and doubted politically whether the government would be able to cut spending. In the view of international investors, the issue was not the “cost” of the tax cuts in financial terms but in political ones. They feared that it would be politically hard if not impossible to justify spending cuts, especially to pensions, if the government “had enough money to give tax cuts to the rich.”

This was a legitimate concern. It is easy to understand why investment banks and hedge funds would advise shorting the Pound and the entire U.K. economy on the basis of a lack of faith in the U.K. political system and politicians to seriously engage with the problems. This rationale would have led one to short it for most of the last decade, and Liz Truss and her former-Chancellor Kwasi Kwarteng merely announcing the shift in direction would not have changed this calculus because investors would have remained convinced they would be forced to change theirs.

The reason for the market assault was not that markets feared the Truss/Kwarteng supply-side program, but that they believed it would be reversed. They feared, with even more justification, that if Truss was forced to reverse her program under public pressure, or even forced out over it, there was no way she or her successors would be able to resist demands from unions for greater funding, the defense lobby for higher spending, or individual MPs opposed to fracking or development projects. Nor would any interest group refrain from escalating their demands in response to a policy of appeasement.

Following the market meltdown, Truss, whether willingly or not, followed the path of least resistance. She fired her Chancellor, Kwasi Kwarteng, a friend of over a decade, for implementing her policy. She replaced him with Jeremy Hunt, a former rival from the “left” of the party who had nevertheless run a highly opportunistic campaign for the leadership this summer, selecting a far-right MP as his ticket-mate and promising tax cuts that dwarfed the ones Truss had proposed. This “elder statesman” promptly reversed Truss’s policies, reinstating tax increases, announcing across the board budget cuts, and even scaling back her energy support package, limiting the guarantee to six months rather than the two years previously announced.

Officially, this was an effort to reassure the markets, which responded with alacrity. The pound recovered from $1.09 to $1.14. But this policy was also aimed at another figure within the Conservative Party, the former Chancellor, Rishi Sunak, who Truss had defeated this summer by a margin of 57 percent to 43 percent. Sunak, a former Goldman Sachs banker, had been putting himself forward in recent weeks as a vindicated visionary, and pushing a media message that only his coronation as Prime Minister, without a contest (which he would likely lose), could reassure markets. Hunt’s actions, in addition to soothing financial panic, were a chess move within the world of Tory party blood sport, intended to cut Sunak off at the pass.

Nevertheless, the announcements did little to help Truss, especially once Truss’s new appointees fell out among each other, a process that took mere days. Just days before she resigned, Truss sacked her Home Secretary, Suella Braverman, one of only two remaining right-wingers in the cabinet, for reasons that appear opaque even to Braverman.

By then, Truss’s policies had alienated almost everyone. Supporters of tax cuts had received higher tax rates. At the same time, the supporters of a working-class, “leveling up” agenda now faced far deeper budget cuts than would have been necessary to sell the pro-growth agenda to the markets. The final straw was a vote, initiated by the opposition Labour Party, to block the government’s plans to expand fracking. What should have been a straightforward defense of a pro-growth policy fell victim to the Byzantine machinations of the party. Fracking was associated with Jacob Rees-Mogg, the Business Secretary, who was a rival of Braverman’s for control of the right of the party.

Billed as a confidence vote, one in which the government would punish MPs who failed to support the government, the spokesman the government sent to introduce the vote suddenly announced, ostensibly by accident (but widely suspected to have been deliberate sabotage by rivals) that it was no longer a confidence vote and MPS could vote as they liked. Mogg was furious, and Truss confronted the whips, who resigned. In an effort to persuade them to reverse their resignations, Truss herself missed the vote, while her Deputy Prime Minister was witnessed on video physically dragging reluctant Tory MPs into the correct voting lobby, some in tears. For Truss it was the end. She gave up the following day.

Her withdrawal is unlikely to resolve the chaos quickly. Policy-wise, the party has fallen into opportunism as illustrated by the fracking vote. Truss, who ran on a pro-growth agenda of cutting taxes and addressing the cost of living, is now preaching high taxes and lower spending. Rishi Sunak, who campaigned as a “responsible technocrat,” is now attacking the government for excessive spending cuts, while opposing fracking. Boris Johnson has indicated interest in running again.

In the meantime, no one is even discussing the underlying issues Truss’s initial program was intended to address. Market concerns about the debt were real, but the time when debt could be addressed solely through austerity is over. For the last decade and a half, the U.K., much like the U.S., has borrowed astronomical sums, not to fund growth, but rather the illusion of it.

In the 1990s, middle class affluence came to be defined in terms not of income or earnings, but rather “wealth,” the amount of assets one owns. Rather than savings, individuals were encouraged to trust in retirement funds which invested in an ever-rising stock market, while house prices rose year after year. This defied economic logic. If productivity was not growing, and the workforce, due to declining birthrates, risked shrinking, with immigration replacing more skilled with less skilled workers, then where was the money coming from to push real estate and stocks ever higher? The answer was debt.

Much as the U.S. college loan program, by offering infinite loans to anyone to attend any school they wished, allowed for rapid inflation of tuition costs, governments undertook a broader program of money printing. Termed “quantitative easing,” banks were lent vast sums of new money to invest in markets, driving them upward. This created the illusion of growth for the economy as a whole and served to negate the ambitions of a generation of workers who watched their investments balloon. In much the same way high marginal tax rates discourage work, so too did asset inflation.

But stocks were not the only assets being inflated. Governments around the world kept interest rates at nearly zero for more than a decade after 2008. The result was that, much as with the federal student loan program, millions were able to take out enormous mortgages to buy houses. This produced a cyclical effect. It meant housing prices remained high, as there was a subsidized supply of potential buyers, which meant homeowners perceived a large increase in wealth. It furthermore encouraged individuals to take out large mortgages for houses they might not even want, at prices well above what the actual utility of the property was, in the belief it was an investment which could only go up.

The problem then was not the printing of money. It was that, rather than using the printed money to cover lower taxes, less regulation, and pro-growth policies (as Truss attempted to do), it was invested merely in inflating asset prices. By the time Truss tried to pivot, there was no more money left.

That is the truly terrifying element, and one which Joe Biden should pay more attention to than he did Larry Summers’s warnings about inflation in early 2021. The danger of high inflation was not that inflation was fatal in and of itself. There are arguments that in a crisis, such as COVID-19, some borrowing could be worth it, or for investments, as Truss later attempted. The problem was that the normal mechanism for curing high inflation, central banks raising interest rates, would not merely limit growth but potentially crash the economy.

In a normal economy, prices for goods and assets go up and down based on supply and demand. That applies to stocks, which should reflect the actual increased earnings of a company, and houses, which should reflect who wants to actually live in them. Instead, trillions of borrowed and printed dollars were invested in stocks on the assumption they would increase above the rate of inflation, all while individuals took out mortgages far larger than their annual earnings. If they suddenly had to pay thousands more a year, they would be forced to sell their homes and assets, causing a market fall which in turn would force others to do so as well, even if their property was now worth less than the mortgages.

While some have fixed-rate mortgages, not everyone does, and even the decrease in demand could cause the prices to fall from their inflated levels. Some degree of correction was inevitable. This could not continue. The simple laws of physics were against it. But something Liz Truss and her advisers grasped was that the collapse could be mitigated if the economy, the real economy, could be grown as much as possible to close the gap between it and prices. Having failed, the U.K. public faces a cost-of-living abyss next year as the housing market seems on the verge of collapsing.

Joe Biden too must realize the dangers the U.S. faces. All of the same arguments he and his allies made for why the student loan system was unsustainable, and that the loans could never be paid back, could also apply to trillions in mortgages. They apply to productivity. Yet Democrats seem determined to reduce productivity, whether through labor rules, environmental policies, or support for woke ESG initiatives. The irony is that many of the arguments Bernie Sanders made about the student loan industry were true. If we continue to subsidize infinite loans for infinite annual tuition rates for an infinite variety of nonsense degrees, taxpayers will end up having to cover the bill. But Democrats refuse to engage the issue.

The Republican Party, like many of Truss’s advisers, understands the vague need for pro-growth policies. They grasp the damage ESG investing has done and the need for domestic energy. However, they make the same error too many of those around Truss made. They fail to grasp that the hour is already too late for Reaganite confidence that the fundamental state of the American economy is sound. They believe that rather than exacerbating the crisis, which they are, Democratic policies are the sole cause, and that if they are removed, somehow the debt will vanish, the stock market will resume climbing, that they can support development to make housing affordable, yet still ensure retirees and the middle class see their house values rise. They believe they can raise interest rates to fight inflation without any negative effects.

The hour is late. Choices will have to be made. It is not yet midnight, however. If clearly acknowledged, these risks will be overlooked by markets which, after all, will go down with the ship of the U.S. economy. Republicans have to be serious about reform. That means showing determination Truss did not, while also recognizing that the task ahead is far more difficult than she seemed to realize.

Daniel Berman is a frequent commentator and lecturer on foreign policy and political affairs, both nationally and internationally. He holds a Ph.D. in International Relations from the London School of Economics. He also writes as Daniel Roman.   

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K. Norris
3 months ago

Truss should not feel bad or concern herself with the U.S. president. He is delusional, incompetent and dishonest. What he has to say is usually a lie. His exploits with his son Hunter have harmed his already questionable character.

3 months ago

Joe Biden and his stupid administration will NEVER take a warning. They know it all. THEY know nothing. Total incompetence.

Casey C Matt
3 months ago

Anyone surprised by the laughable failure of Liz Truss has never heard her vacuously speak on any subject whatsoever. The woman doesn’t have two IQ points to rub together for goodness sake. Anyone ever heard of the woman say……..before the first of this year? She was as she remains, a nobody pushed forward on the basis of her chromosomal makeup and the idiocy of the woke British populace.
Those idiots are actually considering a rehire for the flatulently drunk Boris Johnson.
The UK should now be spoken of in the past tense…….and within the decade so will the United States.

Barrett Smith
3 months ago

This is where the US is headed if we keep on electing tax and spend democrats.

Old Silk
3 months ago

So, quid pro gotta go is gloating about the destruction of the UK. How special!

3 months ago

If you include Social Security, Medicare

Michael Lewis
3 months ago

Some need to be fired, maybe the FED and the Democrat party:

 “If the American people ever allow private banks to control the issue of currency,
first by inflation, then by deflation, the banks and the corporations that grow up
around them will deprive the people of all property until their children wake up
homeless on the continent their fathers conquered.” – Thomas Jefferson

” A disordered currency is one of the greatest political evils. It undermines the virtues
necessary for the support of the social system, and encourages propensities
destructive to happiness. It wars against industry, frugality and economy, and it
fosters evil spirits of extravagance and speculation. Of all the contrivances for
cheating the laboring classes of mankind, none has been more effectual than that
deludes them with paper money. – Daniel Webster

n the words of the economist who helped implement the New Deal Legislation. ”
Lenin was certainly right, there is no subtler, no surer means of overturning the basis
of existing society than to debauch the currency. This process engages all the hidden
forces of economic law on the side of destruction, and does it in a manner not one
man in a million can diagnose”.- John Maynard Keynes

3 months ago

The left shoots poison arrows into the economic beast then attacks anyone trying to apply antidotes. I was in england in the 70s and being young, hobnobbed with people my age. I was shocked to hear from them that all they wanted out of life was a decent flat and food as well as the occasional trip to the continent, as far south as possible. When i enquired further, they explained that the tax structure made it a fools errand to try to ‘get ahead’. There was no point in taking on additional responsibilities in order to earn more because the government took the extra wages back in graduated taxation. Its taken over forty yrs but the millennials seem to think the same way. They spend what they make on immediate gratification assuming theres no economic future for them. Yet they clamor for socialism according to polls. Sobering.

3 months ago
Reply to  Morbious

Hi Morbious,

I’ve been all over Europe for both business and pleasure for decades. The attitude you encountered is pervasive throughout the entire EU at this point, with the exception of the few eastern European countries that are newer entrants to the EU. The thing you have to understand is there is no incentive to strive for any meaningful success in most of Europe due to its punishing tax rates, upsurdly excessive regulations on everything, the VAT that is layered on everything driving up prices to levels most Americans couldn’t comprehend and a history emphasizing conformity to the accept order of things. The last meaning you will never be anything more than what station of life you have been born into. The ruling class will always rule and the peasants will always be peasants. Being successful in Europe is landing a job in the vast EU government bureaucracy that permeates everything today. That is what is viewed as a “high status” career.

Savings generally don’t exist, because after taxes and the high cost of virtually everything, there is very little if anything left to save or invest. Innovation doesn’t really exist in much of Europe, because the idea of taking a risk and trying new things or a different approach is generally frowned upon. Very few young people in Europe, like here in the United States, aspire to make something of themselves and better their lives. It’s all about just living in the moment and getting by. That’s the biggest things socialism does. It saps the will of the populace to do anything but just “get by”.

3 months ago
Reply to  PaulE

Hi Paul E. Our people, including most dems, don’t understand that when dem spokesmen rail against consumerism they’re preparing their voters for a vat tax. You’re right that few get it. If you’ve gotten to know folks from europe only then can you grasp the effects of vat on everything. Its a smothering wet blanket tamping down small business.

Barrett Smith
3 months ago
Reply to  PaulE

I lived in Sweden for a time, and it is just as you described. Most people just do as little as possible and look for a government safety net.

anna hubert
3 months ago

If this is writing on the wall maybe it should be in Braille

3 months ago
Reply to  anna hubert

anna hubert (writing in Braille on the wall): Best Comment I’ve read in a long time, and couldn’t let ut pass seemingly unnoticed!

3 months ago

all the freedom in the world depends on the U.S. and us as individuals in the fight. are YOU up to it? i believe YOU are!

3 months ago

I remember it was not that long ago the the pound was $1.50. What is going on? Who are the people responsible for the failures in these countries? With the dollar week, how can the pound be so weak? I would have thought that the pound would be much higher with a weak dolar,

3 months ago
Reply to  PIDL

The dollar isn’t weak, it’s fairly strong right now — compared to other currencies. Even the price of gold has been dropping in terms of USD.

The strength of the dollar is part of the problem, both for us and for England. People are dumping the Pound (and other currencies) to invest in Dollar denominated products because we’re paying a higher interest rate than other countries. That leaves those countries a hard choice, either raise their own interest rates and deal with the problems that causes or face the problems associated with a devalued currency.

It’s all a giant debt-driven mess and there is NO clean exit. Before this is over a lot of people will be hurt a great deal. AMAC is right to raise the alarm as those on fixed incomes and/or depend on pensions or retirement funds will be hit the hardest (except for maybe those who become unemployed).

3 months ago

Well, she is no Margaret Thatcher.If she was able to explain why this would work, then it did no good that she offered the right policies.

She either did not believe in herself and her policies or she was forced to cave. Either way, this is the end of England. And if we are that weak, it could spell our end, too.
If ever we needed Arthur Laffer and Larry Kudlow and Stephen Moore, it is now. And we must listen to them.

3 months ago
Reply to  Honey

unable. I do wish there was an edit button.

3 months ago

Tuss was ultimately undermined by her choice to try and thread the needle between between the globalist socialist push towards the green new deal, massively higher government spending, higher taxes, a vast expansion in the regulatory state touching every aspect of the economy, and the resultant higher inflation and economic stagflation versus truly embracing pro-growth tax cuts, a sharp reduction in government spending, loosening the regulatory stranglehold on the economy and focusing on getting England’s domestic and off shore oil production back on-line to reduce inflation. So her half-hearted approach ended pleasing neither side of the political aisle and was doomed to failure because it still accommodated far too much of the socialist agenda and not enough of the pro-growth conservative agenda to offer a path to a restoration of the British economy and a much lower inflationary environment.

The truly sad thing is there is some talk of Boris Johnson making a return to the role of PM. That would be a huge mistake, as Johnson was the PM who showed his true colors by embracing the globalist socialist model after gaining power and put most of the destructive socialist policies in place to create the economic destruction England is now enduring. There is no happy middle ground between socialism and capitalism. That is a fiction the media tries to sell the ignorant and uninformed masses. It is an either or proposition, because the more destructive socialist policies are adopted, the more the benefits of capitalism are eroded away.

Europe should be a stark warning, with red lights flashing everywhere, to the people of the United States as to what their own future will look like in a few short years on our current path, if they don’t make a major course change very, very soon. Western Europe willingly embraced ALL the destructive socialist polices that are currently in the process of being imposed and implemented here. So you can readily see what the end results will be each and every day on any European news outlet. Sadly, I fear too many prefer to bury their heads in the sand, yet again, and hope some magical event saves them from their own bad choices or inactions.

3 months ago
Reply to  PaulE

As usual, your last paragraph is on the mark. Unfortunately very few Americans truly understand what is going on and as long as the Left/Demos remain in charge, the destruction of this country’s foundation principles will continue.

3 months ago
Reply to  Max

And most of that ignorance is result of the mainstream media lying, hiding information and just plain refusing to report unbiased news! Should they (MSM) ever reverse course, there would be no democrat party!

3 months ago
Reply to  MOcountry

Closer definition of an actual Symbiotic Relationship than Webster!

Bill on the Hill
3 months ago

Joe Biden is the LAST person on earth to lecture anyone on how to run an economy… The US cannot continue on the path this current embecile calling himself potus along with his ( 2 ) key advisors that are always in the shadows, but rarely seen or heard from, i.e. Ron Klains, Biden’s Chief of Staff & none other than Susan Rice, director of Biden’s Domestic Policy Council for the Democrat Party…The rest of the current administration is close to 100% former Obama people… 2024 can’t get here soon enough, that is if it isn’t to late already. I believe our economy has already left recession status & is well on it’s way to a depression of the likes none of us have ever lived through, I pray I am wrong here, the midterms will deal the Democrat Party a shellacking at the polls in a few weeks, but it may not be enough, even under GOP control of both Houses to stave off what I’m talking about here, only time will tell as Biden & company quietly makes the student loan forgiveness debacle going away, he, i.e. they now realize it was completely unsustainable, not to mention completely unfair to those whom are/were responsible enough to pay down their own voluntary college debt., as it should be, Biden will NOT garner the young peoples votes for cancelling their respective college tuition debts, score a win for America & loss for Biden & company on that score…
God Bless America & let us indeed MAGA…
Bill… :~)

3 months ago

He is doing a bang up job, isn’t he? What a friggin’ idiot. After reading this article, it seems the liberals have created a stronghold on the world governments. They will control the economy until a worldwide depression takes hold.

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