Trussonomics: a failure of policy or of communication?

More overnight AirBnB than long-term let, Liz Truss’s stay at No 10 Downing Street is now almost certain to be painfully brief. To borrow a famous political phrase: she remains in office but not in power.

Does it matter whether this unedifying episode in British politics was a failure of policy or a failure of communication? Ultimately both are a failure of government.?The inability of the Prime Minister and team to explain their policies with clarity or conviction will rightly remove the Conservative party’s hold on power for the foreseeable future and challenge its reputation for fiscal prudence for a generation.

But how much of the dramatic sell off in gilts so key to the U-turns and Truss’s likely demise can actually be attributed to global investors spooked into demanding a higher UK risk premium versus the now infamous LDI doom loop? The former is a direct commentary on perceived UK policy risk and reward, the latter clearly isn't. While I would caution strongly against the use of short-term market reactions as some sort of unarguable declaration of economic truth, the distinction is once again now probably irrelevant. After all, it was Truss and Kwarteng’s failure to take such risks into account in the first place against a backdrop of seismic changes in bond markets that shows just how na?ve and ill prepared they were.

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Nor apparently did Truss and Kwarteng appear to understand that fragile markets might take umbrage at a new government not merely at vague political odds with its central bank - such a scenario is hardly unusual - but in direct confrontation. A little unlucky with regard to the timing of the confrontation? Not really, all politicians must play the hand that they are dealt.

For the record I hoped that Rishi Sunak would lead the Conservative Party after Boris Johnson and that we would return to some sort of grown-up politics with a moral backbone. But while I have virtually no sympathy for Truss, I have found much of the coverage of this car crash period in British politics jarringly inconsistent and riven with confirmation bias.

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In particular, for more than a decade we have witnessed central bank policy via QE make perverse economic incentives the bread and butter of the global economy and capital markets. Let's not forget that central banks including the Bank of England printed money and bought risk assets. QE has directly encouraged corporate leverage to a level that I believe will send developed economies crashing into a much deeper and longer recession than is currently discounted in markets. Oh, and QE of course has created the mother of bubbles in asset prices. For the world’s central bank glitterati to now condemn Truss and Kwarteng as irresponsible given the imbalances and moral hazard created by QE seems unbelievably disingenuous.

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In undertaking QE central banks also explicitly targeted precisely the same trickle-down wealth effect currently being lambasted as immoral in the hands of the Conservative party. QE directly benefited asset owners, significantly widened the inequality gap and made the rich richer on a scale that renders the short-lived policies of Truss and Kwarteng superfluous by comparison.

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Whether these were the wrong fiscal policies at the wrong time or simply poorly communicated by the wrong people doesn’t now matter. We will never know whether they would have worked or not. But it is self-evident that with monetary policy turning restrictive, fiscal policy and the broader business environment must take up the slack if demand growth is not to slow dramatically. And after relying on the drug of easy money for so long, some (better thought out and clearly communicated) policy dynamism and innovation is surely going to be needed to support long-term demand growth.

So when we are dishing out the brickbats while pondering the UK economy, its public finances and its capital markets, let’s at least acknowledge that the drivers of markets in particular are nuanced and that institutions other than the government have played a significant role in creating many of the challenges we now face. A weak currency versus the US dollar, rising core inflation and climbing government bond yields are also hardly unique to the UK and were well established global themes long before this debacle.

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Liz Truss and Kwasi Kwarteng demonstrated an unforgivable lack of understanding about current market forces and were guilty of a plethora of sins against basic political competence and communication for which they will rightly pay with their careers.

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But the asymmetric risks of LDI plus the moral hazard and dangerous structural imbalances created by QE are not among them.