The UK economic crisis has come a bit unexpectedly to analysts who had been focusing on the fiscal problems occurring in the US, Japan, Europe, and much of the Middle East. Some blame the issues on Brexit, some on bad economic policies, and some on the energy situation. It is possible quite a few of those factors, as well as others, have contributed to the issue. I am not a UK economic expert, but market analysts such as those at the AP have provided their read on the situation across the pond.
“While Truss came to power at a difficult time — facing a cost-of-living crisis, the war in Ukraine and the lingering effects of the COVID-19 pandemic — her decision to announce 105 billion pounds ($116 billion) of tax cuts and spending increases without providing details on how she would pay for it spooked markets concerned about soaring public debt.”
Per the AP article, Truss was the choice of the party members, but not of the party lawmakers. So, the party was divided between her and new UK PM Rishi Sunak. Considering Truss did not win the mandate of her party, the reality seems to be the Conservatives did not have a clear leader. And perhaps they did not have a clear plan either, as the policies they enacted, while philosophically aligned with the party, were not effective given the current UK economic crisis. In other words, experts seem to think the Conservative party did not have a cohesive strategy about what to do. My question for our side of the pond is, do we have a cohesive strategy in the US?
It’s the Economy, Stupid
The popular phrase above, credited to political analyst James Carville in 1992, seems to fit the bill here. Regardless of how it all went down, the UK now has to figure out what to do next. Fixing a shrinking economy loaded down with debt in a rising interest rate environment is no easy task. Just ask the Fed and other world central banks who are chastised by the UN on their recent tightening monetary policies.
“The Federal Reserve and other central banks risk pushing the global economy into recession followed by prolonged stagnation if they keep raising interest rates, a United Nations agency said Monday.”
Whatever the economic powers that be decide to do, I am sure of one thing: it will be highly controversial. And probably highly entertaining, as well. Meaning, I think we may get some animated arguments between different economic players and agencies who are affected differently by the central policy.
And that’s no surprise because economies have never really done well when centralized institutions try to manage them through a crisis. Typically, the bigger problems get kicked down the road until they metastasize into deeper crises. It would be accurate to say that the debt issues that we faced in 2008-09 have not really been solved as much as ‘papered over’ by accommodative monetary policy. While it did stave off a much deeper recession at the time, the reality is we still need to address the underlying issues causing the economic problems. And these same types of economic problems appear to be popping up around the world this time.
At the end of the day, business cycle downturns happen all the time. It is just part of the overall economic cycle. The question is whether all of the interference by governments and central banks have done more good than bad, and whether their response will keep the economies from spiraling into a deeper recession.
I am not completely negative on the role of the banking and political systems to affect good policies. However, it does seem that when the down side of the economic cycle happens, those same entities like to double down on approaches that would seem counter to sound market ideology. Sometimes it just makes sense to let things fail that should fail, learn from them, and move forward with better ideas.
It’s just that world leaders don’t want the market to figure it out because the effects of allowing failure would cause people to replace them, and not always with better alternatives. In a panic, “We the People” also tend to make less than completely effective decisions. We are all just human after all.
The debate between free market economics, and a mixture of central planning, is an age-old one that I am not trying to solve here on this page. However, I DO think that it is quite wise for us to examine the pros and cons of every approach in the search for something better. That is certainly a concept that most people I think would agree with.
Back to the Economy
This was not intended to be a political article; however, I wanted to make the obvious point that political process exists to help allocate resources to their best use. Otherwise, why would we need them if we could do it all ourselves? Back to the UK economy, the Guardian pointed out in a recent article that Britain has joined the 100% debt to GDP ratio club along with the US.
As we know from one of my recent articles, two Harvard researchers have pointed out that the ‘point of no return’ ratio of debt to GDP is 90%, after which economies tend to crash down while requiring debt write-downs and high inflation. Essentially, what the UK and US have in common is that they both need a financial system restructuring, or face a much deeper collapse of the debt system.
I am not trying to scare anyone here or make a certain point about the role of banks and the government during the economic cycle. More, this is an exploration of the issues as they stand and a call to everyone to work together to address them. Why? You ask.
Because this time the financial system is global. Foreign investment flows have exploded; meaning everyone is invested in everyone else. Thought to be the hallmark of globalization intended to find the most efficient allocation of scarce resources, globalization itself has come under pressure. More and more countries are electing to deglobalize and bet on themselves. Per Chatham House:
“Increasingly policymakers struggle to articulate an appropriate balance between global and local solutions. How much should international trade in goods and service be curbed or facilitated? How can the global climate change challenge be met by competing, sometimes hostile nations? How is migration to be managed and its push factors adequately addressed? How are wars and conflict to be managed? To what extent should responses to health emergencies be dealt with by international organizations?
This effect on the political imagination inevitably has a knock-on effect on the trade and financial flows that underpin global trade, weakening confidence in the safety of international investments.”
Again, we see the marriage between economic and political philosophies taking center stage. As I said, it is an age-old one. The inescapable truth is that while our leaders endeavor to solve the problems caused by the business and economic cycles, they also contribute directly to the efficacy of those same systems that have been put into place, often of their own design.
Final Thoughts
I don’t know if there are easy answers to this question, because if there were, far smarter people than me would have figured them out. The conclusion to all of this, for me, is fairly simple. We are never going to have a perfect system, but we should try to implement the best ones we can. When the inevitable ‘winter’ season comes for world economies, the most important thing is that we all have a voice and work together as much as we can.
For if world nations go into a mercantilist or protectionist mode, history has shown the economic and political consequences of it all to be very disturbing to the daily lives of the people. That is why it is incumbent on the people to be aware of what is going on and to form an opinion with the best information at hand. It is the town hall approach combined in the Internet age with the best of the information systems that should give us a bit of an advantage this time.
We just hope our leaders are listening and react with the same level of concern and study that we do. I am sure they will. But history shows that despite the best efforts of men, sometimes natural economic law cannot be denied. Just as we cannot stop the aging process, we cannot stop the economic cycle. Sometimes we just have to learn to live with it while managing its consequences.
Living with it also includes making appropriate preparations, and I believe precious metals can still be a big part of that plan. It is, at least, something we can do at the individual and family level to reduce the effect of the cycle on our own lives, while our leaders do their best to figure out appropriate policies and solutions for the longer term. Perhaps that is the best collaborative approach we can all take at the moment. I am open to ideas.
