The New Truss Trickle-Down Economic Plan Won’t Work, But Might Boost Markets

Blain’s Morning Porridge, September 21^st 2022: The New Truss Trickle-Down Economic Plan Won’t Work, But Might Boost Markets

“I am sick and tired of trickle-down economics. It has never worked.”

This morning– The new Truss/Kwarteng grand plan to create a UK High Growth High Wage economy boils down to trickle-down economics, which simply don’t work. They won’t restore the economy, but they may, perversely, boost markets.

Global markets look pants. It is little wonder markets are stalled, stocks wobbly, bonds beaten, and entrepreneurial spirits crushed. Yet again the outlook looks incredibly bleak: Europe struggling with high inflation and a self-inflicted energy crisis, the UK struggling with just about everything, and the US on course for deepening recession. As someone once said… “when all around panic, look for the opportunities!” That might just be a tad premature call – today, the Fed will hike rates. Tomorrow, so will the Bank of England. They will be big ones.

The current Cake of Crisis is a multi-layered monstrosity.

• At the bottom is inflation and how to address it – the only option being higher rates are nailed on to increase the economic misery.
• The filling is inflationary consequences – a rich mix of wage-inflation, rising social tensions and growing industrial unrest.
• The next layer is the war in Ukraine – how much economic pain will European citizens bear in order to contain the ravenous Russian bear.
• And on the top, proverbial icing on the cake, we have politics; in the US is the populist treacle of Trump’s Republicans vs anyone and everything, Europe trying to deal with Italy and Hungary, while in the UK we have Liz Truss telling us she’s prepared to be unpopular. Unfortunately, she doesn’t look likely to be

But, but, and but again…. Just when its darkest, and all that. There will definitely be investment opportunities.. and soon.. But, maybe just not yet.

The strangest, but least beneficial opportunity, is likely to occur here in the UK – and we will have Liz Truss to thank.

I am a rational market strategist, therefore I will resist the temptation to start the morning with a completely over-the-top rant about just how awful the grand economic and growth plans of Liz Truss and Kwasi Kwarteng are likely to prove. The plans are regressive, and are unlikely to succeed. Let me explain why.

Liz and Kwasi have apparently spent the last month working on an economic growth package, and are set to announce them on Friday. I could call bollchocks on the festering midden of recessive tax-give-aways and blatant electioneering we’re likely to be granted on Friday – but I will remain polite and calm. I could call her claim that it’s a holistic plan for growth as codswallop and bunkum, but I shall refrain.

Let me start by casting doubt on whether it really is a seriously considered “grand plan”. Its an election package of handouts to create a brief economic bloom.  If Truss and Kwarteng really had spent the last month cloistered in serious “economic discussions and planning”, then we would know all about them. Historically, Liz Truss has leaked like a sieve with a massive hole in the middle. If her and her chancellor has been putting together the ultimate growth plan – it would have been all over the papers like a bad rash weeks ago.

More likely the pair of them come up with the “plan” over a bottle of Downing Street plonk late last week… That could have happened after she and Kwasi read innumerable articles and research saying the lack of any competent plan for the UK was a crisis point. It became abundantly clear the strategy she successfully pursued through the Tory leadership campaign of channelling Margaret Thatcher – while avoiding her default look of pathetically staring into the headlights of economic disaster – was unlikely to work for her in office, unless she had a plan..

And Kwasi is very good at plans, and telling people how good his plans are. The plan is simple. Massive handouts and tax cuts. Early Election writ large across it.

I am keen to know who has advised them on this plan. Dr Gerald Lyons and Prof Patrick Minford (a monetarist who was used to scare young economists like me back in the 1980s) are in the frame. As Kwarteng’s first act in his new job was to sack the Head of Treasury – who from government was advising them? Sir Tom Scholar was sacked because of his “treasury orthodoxy”. Did he have the temerity to stand in the way of the new policies and thinking snap election plan? Or because he might just have called out the new plans as ill-considered?

Even through the Royal Funeral, Truss was under increasing attack from economists and analysts, keen to hear how she intended to deal with the looming crisis. The lack of any joined-up plan, and the time it’s taken to reveal it strongly suggests it’s been cobbled together from whatever ideas her and her advisors have thrown into the pot.

Unless she delivers something solid and complete, it’s going to further erode confidence in the UK political economy, the currency and bond market – the Virtuous Sovereign Trinity of successful growth economies.

So… what is the plan? Full details on Friday, but of course they have already been leaked by the Truss camp…

The plan is simple – pick a bunch of headline generating noisy ideas and back them with some empty bluster about how they will create growth and wealth. Start with some free ice-cream today in the form of tax-cuts, argue it will take a couple of years for these to work through the economy, make lots of noise about how we have to stick with them, and hope they are convincing enough to scrape through at the next election – sometime soon I expect.

Let’s start with the key corner-stone policy of the Truss Growth Plan: a quick sop to the global banks and a finger up the nose at Europe by increasing banker bonuses! Yay.. lots of richer bankers pushing up prices in London, and more banks setting up shop here rather than not setting up in Frankfurt. Yes, it’s good for banks. It’s pretty pointless for the economy – being completely London centric, (so much for levelling up).

But, the big but, it is being sold as a Brexit Benefit by Kwarteng to the frothing-at-the-mouth Brexiteers who gave Truss the job. Brexit is apparently done, so why does it still dominate every action of the government?

To avert a housing crash, they also intend to kick-start the stalled top-end of the housing market, and maybe get rich folk piling into the UK to buy homes, spend money and build high value business… At which point Kwasi pipes up.. “Spot on, cutting stamp duty is a prerequisite to everyone getting high-value jobs in our high-growth economy by attracting inward investment..” or some such bollchocks.

And then announce a series of income tax, VAT and national insurance cuts which again will benefit the wealthy. The Institute for Fiscal Studies has calculated the tax cuts Liz Truss has announced will make the poorest three million households in the UK better off by 63 pence per month. No problem – they don’t vote Tory.

Basically.. Truss’ plan is to generate growth through the time-honoured mechanism of trickle-down. Simple put – if you allow the wealthy to pay less tax, and retain more of their wealth, then they will spend it on making everyone better off by creating jobs, industry and commercial opportunities..

Bollchocks. I don’t want to burst her bubble… but….

Yesterday President Biden of the US made a revealing comment on Twitter: “I am sick and tired of trickle-down economics. It has never worked. We’re building an economy from the bottom out and middle up.” He was mercilessly attacked by the American right – who passionately believe its wealthy entrepreneurs who will save society from the plague of left-wing interventions. They have a point – America is a mess.

But, I still believe Biden is right, and Truss is wrong. There is proof.

For the last 12 years – incidentally how long the Conservatives have been managing the UK economy – we’ve been involved with the biggest experiment in Trickle Down economics ever. Quantitative Easing was originally sold to the economic commentariat as a mechanism to boost economic growth by forcing money into the real economy. By buying back Gilts from the market, the idea was investors would then have to put their money into the real economy, supporting growth.

The effect was to pull down the real-risk-free rate in the economy – making money cheap – forcing investors to take more risk by investing in growth to garner returns. That was the theory, the same theory than underlines trickle down – that if you give the wealthy more money, they will invest it in growth.

They did not. They invested all their money in financial assets! Instead of investing in job and wealth creating new factories and businesses, they bought bonds and stocks, fuelling the massive rally of the monetarily distorted 2010-2020 period, and creating a massive widening in wealth inequality – the rich got richer and the poor got poorer.

Exactly the same thing is going to happen under the Tories tax and benefits give away – the Fiscal Event on Friday. Money to the rich. The bulk of the policies she proposes are regressive and will merely give those with money to burn, more money to spend – which they will do by making themselves richer, buying more stocks and houses, while the poor get poorer. It will ultimately resolve nothing about the economy, levelling up or create wealth and jobs.

This is not a rant on behalf of the Labour Party – I might even join the liberals – but just a simple warning about what history shows will happen as a result of the regressive tax, stamp duty and bonus policies the new Truss government thinks will bailout Britain.

Perversely, it’s the reason the UK markets are going to remain distorted, and thus look more attractive than the underlying economic reality.

Being courageous in UK politics is taken to mean doing the right thing, even though its highly likely to end your political career. In contrast, Liz Truss is being pragmatic – doing something she hope will preserve hers…

No time for Five Things this morning…

Out of time, and back to the day job – but first, a morning in hospital checking out my dodgy ticker…

Bill Blain

Strategist – Shard Capital