The mini-budget continues to provoke controversy, with the Conservatives slumping in recent polls and Labour gaining significantly. However, markets stabilised over the week, with sterling rebounding to $1.10 and €1.14. Markets were buoyed partially by the fact that the UK narrowly avoided recession, defying naysayers to grow 0.2% in Q3. Research for the consultancy Cebr also suggests that the mini-budget may be much cheaper than was feared. In particular, the declining price of gas on world markets is considerably reducing the cost of the energy bailout.
A Ray of Hope?
On the continent, Germany unveiled an energy support package it costed at £155bn. Bond prices in Europe have also been rising since the start of September, albeit at much slower rate than in UK, as investors price in renewed Eurozone risks of recession, geopolitical turmoil and the possibility of a showdown between Italy’s Georgia Meloni and the European Commission over spending limits.
Long-awaited, Russia’s sham referendums in the occupied areas of Ukraine have produced the expected majorities for annexation. Aside from the slim propaganda value, according to Russian law this allows Putin to send conscripts to occupied regions – a more credible prospect than his nuclear bluffing.
To add fresh outrage, Russia is widely suspected of breaching the Nordstream 1 pipeline. Russia’s potential motive here is murky, given that it no longer sends gas through that pipeline to Europe. It could be an attempt to improve its image in the third world by blaming the “Anglo-Saxons”, and linking Western sanctions to increasing global prices – claims re-iterated by Chinese authorities. Remarks by Putin suggest Russia may also be trying to drive a wedge between European and US/British responses to the invasion.
Marauding Saxons put Pipelines in Peril
Mobilisation efforts in Russia have prompted significant backlash. Huge queues have formed of mobilisation-aged men seeking to leave the country, and in the far east a local shot a recruiting officer. While the Russian government has promised to address the “irregularities” in the process, and confirmed that it won’t seek extradition of draft-dodgers, it does not yet appear to be changing course. Ukrainian officials have claimed that the Russians’ lack of equipment and training is even worse than we might have predicted – many reportedly receiving merely a uniform and a rusty rifle.
Co-Editor Graham Gudgin wrote for the Belfast Newsletter about the recent demographic changes in Northern Ireland, suggesting that predictions of imminent re-unification are premature. Co-Editor Robert Tombs interviewed David Jones MP on the mini-budget, Brexit, immigration and more – check it out on YouTube.
The Mini-budget, Good but could be better, by Catherine McBride
Three cheers for Liz Truss and her Chancellor, supply side reforms in energy and infrastructure are just what the economy needs. As is a politician who actually does what she said she would do during the election. But there are some areas of the mini-budget that could be improved.
“Although the Chancellor’s proposals will mean a larger borrowing requirement, borrowing to rebuild a stronger economy is a good thing. Printing money to buy everyone a pizza during the Covid pandemic was not. Cleverly, Liz Truss is borrowing to restructure the UK economy, and it will help if our currency is lower.”
The Inspector General Is Back, by Adrian Hill
Former soldier and diplomat Adrian Hill likens Putin to the Inspector General in Gogol’s satirical play. In the play an imposter inspector general accepts bribes and disappears before the real inspector arrives. Partial mobilisation is a gamble, he argues, that will not provide the Russian Army with effective reinforcements on the scale needed to avoid defeat.
“Compare this shambles with the British programme for training 10,000 combat ready soldiers every 120 days to the same standard as our soldiers, who understand command from the bottom up… Effectively the British programme adds a new division’s worth of trained infantry soldiers every 120 days, all of them capable of quickly learning the skills of combined arms warfare.”
Trussonomics Will Work if Supply Side Reforms Are Delivered, by Robert Lee
The UK’s radical change in economic policy is a gamble, but is well considered and necessary this article argues? The new policies are firmly based on classic market-based economic principles. The critics are exaggerating the risks and underestimating the potential for higher growth through supply side reform and tax incentives.
“The UK is currently in a stagflation phase – stagnant economic growth and high inflation. The textbook macroeconomic policy response to stagflation is to promote growth through easier fiscal policy and to fight inflation by tightening monetary policy. Policy is currently being re-balanced in this way, with the BoE steadily raising interest rates.”
Key Points – The Looming LDI Issue
Regulators have been aware of the market’s problems for some time now.
One of the issues worrying markets is the dangerous situation with liability-driven investment strategies, or LDIs, which have been popular with pension funds. In brief, these practices involve buying bonds, and using them as collateral to raise further finance. Such finance is often used to pay out liabilities to pension scheme members.
These schemes were attractive in an era of low interest rates and relatively expensive government bonds, but are vulnerable to a fall in bond prices. When funds want to sell to pay out their liabilities, they receive less money, or alternatively have to provide more collateral when they want to invest in more bonds. The resultant crisis has seen the Bank of England pledge to use £65bn of reserves to prop up the LDI market – funds ultimately underwritten by the taxpayer.
Yet the Bank of England and the Treasury have been aware of these risks since at least 2018, when it published a report into the sector’s risks. Hindsight is of course 20:20, and these systemic risks precipitated faster than institutions might have been predicted.
Nonetheless, it is hardly a great a vote of confidence in the collective wisdom of British financial regulators, and seriously questions their claims to expertise. Given that the former Treasury Permanent Secretary was working from home from South America at the time, it suggests voters and politicians are right to treat technocratic claims with scepticism.
Law and Vandalism
Readers may have seen that the Court of Appeal has ruled against “The Colston Four”, in an Attorney-General’s Reference, holding that the Human Right to Freedom of Expression does not justify criminal damage. For those who (mercifully) haven’t had to learn the rigamarole of appeals procedure, an Attorney-General’s Reference clarifies a point of law the Attorney General believes was wrongly decided by a lower court. Importantly, it doesn’t impact those already cleared by a jury verdict of not guilty: so the Four will remain free.
On Twitter, many barristers have criticised the High Court’s ruling. But as Tony Dowson argues for The Critic, the ruling is eminently sensible. There is no legal support for the idea that criminal damage is justified by free expression, either in caselaw, or European Court of Human Rights jurisprudence. It would grant judges a vast new remit to decide what expression justified violence, and what did not – would a fascist who damages Labour Party property have a human rights defence, and if not why not?
In summary, ignoring partisan pearl-clutching about human rights, the decision is eminently sensible.
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How you can help
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A Cambridge PhD Student
Economist, Centre for Business Research, Judge Business School University of Cambridge
Emeritus Professor of French History, University of Cambridge