2nd October, 2022
By Umair Haque
Over the last week or so, a lot’s been written about Britain. Its self-inflicted economic catastrophe, to be precise. The story so far goes like this: the new Prime Minister and her Chancellor — the equivalent of the Treasury Secretary — unveiled a new budget. They’re ideologues and fanatics, and their budget shocked and stunned…the world of finance and economics. Economists reacted in horror, and the markets proceeded to have a fire-sale. The pound crashed, because the “budget” wasn’t much of one — its central idea was to borrow a huge amount, $500 billion, largely for tax cuts on the very, very rich.
Trickle down economics had struck again — except now, it was discredited even in the place which had invented it, America. Its last stronghold was…idiotically…Britain. And the new budget was so extreme that it was too right wing even for the markets, which are already the world’s most right wing institution. Various commenters referred to Britain, openly, as the Argentina or Venezuela of the rich world.
That brings us to now, and what happened next — and what happens next. I’m not going to mince words. Britain is committing economic suicide. No, I’m not kidding. The moments when I’m wrong about economics are few and far between — and frankly, any half-decent economist should be able to see what’s coming now.
The new PM got on TV this weekend — after a disastrous series of radio interviews — and missed her opportunity. To correct the mistake, to walk back the horror-show of a budget, to do anything to fix things. Instead, she doubled down, because, well, apparently, she really is a right wing ideologue. That means that Britain is now poised to become the most far right wing country, economically, on the planet, more or less. Way to the right of even America. Where, for example, Joe Biden is investing in sane and promising things like chip factories — not cutting taxes for the super rich by borrowing massive amounts.
Britain is on the road to complete economic ruin now. Comparisons to Venezuela and Argentina aren’t overblown. In fact, shortly, the country’s credit rating is going to be downgraded — it’s already “on notice,” which is what Wall St says to soften the blow. This is how you become a poor country. But that’s just the tip of the iceberg. When I say Britain is on the road to economic ruin, I’m not kidding. And I don’t think Brits understand that they’re now going to be ruined, financially and economically. At least vast numbers of them are.
The very first effect of this budget — now that we know the PM and her Chancellor won’t learn from their mistake — is that interest rates are going to skyrocket. And in Britain, that’s going to have an absolutely ruinous effect. American average household income is more than $60K. Britain’s isn’t even half that — closer to $30K.
A chain reaction is being set off, which can’t be easily stopped, if at all — and it’s going to lead to slow-motion economic implosion.
That’s because three things are about to happen. Let’s take each, one by one.
The very first effect of this budget — now that we know the PM and her Chancellor won’t learn from their mistake — is that interest rates are going to skyrocket. And in Britain, that’s going to have an absolutely ruinous effect. American average household income is more than $60K. Britain’s isn’t even half that — closer to $30K. Furthermore, British mortgages roll over frequently — Brits refinance them every two, five, seven years, whereas Americans now often take on 30-year ones at relatively fixed rates.
So imagine what happens to a country of people with half America’s household income — as interest rates skyrocket. That’s right, a very, very large number stop being able to afford their mortgages. Their credit card bills and car payments and household bills, too. But mortgages is the biggie, the Main Event. Why?
Britain is now poised for something very much like America’s subprime mortgage — and housing — crisis. If that sounds ominous, that’s because it is. Large numbers of Brits aren’t going to be able to afford their mortgages on their relatively low household incomes — they can barely afford to keep the lights on right now. As they begin to miss payments, banks are going to give them the standard grace period of three months. Probably, it’ll be extended to six, given the circumstances. But banks can’t let people miss mortgage payments forever. Foreclosures will begin.
People are going to lose their homes. A lot of them. Do Brits understand this? I ask because so far, they’re not acting like they do. And yet this is what’s very much on the cards now. It’ll take months to happen — but the fuse has now been lit, and the bomb is almost certainly going to go off.
What happens as people lose their homes? Well, there’s huge pressure on public services. People end up homeless. They try to stay warm at “warm banks” — what public libraries are being turned into in dystopian Britain. They don’t have anywhere to go. They can’t keep their jobs, keep their families together, consume like they once used to. We’ll come back to all that shortly.
Banks have to foreclose on people who miss mortgage payments. Now the banks are the owners not just of those homes — but the bad debt behind them. And that tends to take banks down, fast. So now, just as in America during the subprime crisis, there’s not just a housing crisis, there’s a banking crisis. And what happens when there’s a banking crisis? That’s right, a bailout does.
So now there’s mega pressure on public finances in two ways — one, a new army of people who are homeless, with nowhere to go, yet must still be supported, and banks who need bailouts, too. Let me emphasize again that this isn’t some kind of outlandish prediction, it’s just the consequences of basic economics, which neither the PM nor her Chancellor seem interested in understanding.
But even that’s just the tip of the iceberg, really. Now we have an impoverished country — with legions of newly homeless people, and banks that need bailouts. What else happens, though? Grimly, a lot does.
Last week, in the aftermath of the disastrous budget, the Bank of England had to put the nation’s pension funds on life support — because there was a run on British bonds, which pension funds hold significant amounts of. That life support package already costs $65 billion, and it’s only good for two weeks. What happens if it’s suddenly lifted? Exactly the same thing, all over again. A run on bonds. Now the nation’s savings literally need to be kept on permanent life support, or they’ll simply implode.
Do you see how jaw-droppingly bad that is? It means that people won’t be able to access their pensions, very shortly. Entire generations of Brits are going to find their pensions suddenly slashed — but they’re going to need the money desperately.
Why? Well, because the pound’s imploded, and guess what that means? That’s right, inflation. Britain’s already facing some of the highest rates of inflation in the world, because it suddenly broke up with its largest trading partner, and now getting the very same goods from Europe requires red tape and fees and tariffs and so forth. But now? With the pound dropping by 10–20%, that means prices are going to go up by the same amount, because Britain’s a net importer. That’s another 10–20% of inflation — bang — just like that.
Remember how British households are already going to struggle to pay their mortgages — and fail — especially given they can barely pay skyrocketing household bills, on their relatively low average income? Now imagine how much worse even more inflation makes the situation. Right now, Brits think they’re going to have to choose between heating and food. That’s Dickensian enough. But it’s closer to the truth to say that they’ll have to choose between keeping their homes and food.
Britain’s already facing some of the highest rates of inflation in the world, because it suddenly broke up with its largest trading partner, and now getting the very same goods from Europe requires red tape and fees and tariffs and so forth. But now? With the pound dropping by 10–20%, that means prices are going to go up by the same amount, because Britain’s a net importer. That’s another 10–20% of inflation — bang — just like that.
What would you choose in that situation? Tough choice. Impossible one. Terrible one. People will do what they have to do, which is default on their mortgages to feed hungry mouths. And elderly people, who are going to find their pensions wiped out, are going to find themselves in truly dire conditions.
Do you see how bad this is getting? Like I said, comparisons to Argentina and Venezuela aren’t overblown. Maybe Britain won’t reach the absolute levels of poverty Venezuela has — but market commenters raise the comparison because the mechanisms — and the sudden descent into abject impoverishment — are precisely one and the same. Governments who ignore basic economics and finance — and blow up their economy, relegating huge numbers of people to sudden, staggering poverty.
Whew. That’s a lot, and yet we’re still not done. Keeping the nation’s pensions on life support has a price, too. The Bank of England is going to have spend hundreds of billions on it. And as it does, the pound is likely to fall further, because the Bank is effectively just printing money, buying government debt in an endless cycle to prevent a run. It can do that for a while — but not forever. And as it does, each day it does, pressure builds for a sudden run on the pound. When that happens, the vicious cycle above will intensify suddenly, like a huge hurricane hitting Category Five — plunging pound, even more inflation, impoverished people even less able to afford their bills, from mortgages to credit cards to food and energy.
Sound grim? It is.
But the worst part is yet to come. The fanatics and ideologues who now run Britain have already announced the next part of their plan — guess what, it’s more austerity. How are we going to balance the books, since we’ve borrowed $500 billion for tax cuts? We’re going to cut public services.
Now. This is going to be a little technical so bear with me, because it’s important to understand.
Why are Britain’s household incomes so low? Because its economy has seen a lack of growth for about a decade and a half now. If growth had kept pace with Europe, or even America, Britain’s households would be about $10K richer, and we know that because Europe’s are, whereas America’s are about twice as rich.
So. Why is Britain such a low-growth economy? The answer to that is deceptively simple. Growth began to stall precisely when Brits were foolish enough to elect ultra-conservative governments, who slashed public investment. For a modern economy, public investment is the key to growth: a developed country needs armies of people working in everything from public healthcare to media to transport to finance, to beyond, next-generation jobs like clean energy and research and development in 21st century systems for food and water and so forth.
Without such investment, the floor falls through the economy — like it did in America. Stable, relatively high income jobs disappear, and what’s left is the modern corporate economy, which is feast for a tiny number of ultra highly paid executives, and famine for the rest — legions of gig workers, people working in Amazon warehouses managed by algorithms and devices that monitor their every last movement. No public investment, little growth — or worse, whatever growth there is is concentrated amongst the ultra rich, which only fuels extremist movements like Trumpism, as working and middle classes collapse. This is a lesson that America learned the hard way, and Biden’s trying to reverse, with historic amounts of investment.
Now we’re going to connect the dots, and the conclusion we’re about to reach is going to be horrific. Britain’s a low growth economy precisely because it’s chosen austerity for more than a decade now, which has starved the economy of the very investment — in people, in institutions, in cities and towns — that it needs to grow. Hell, in Britain’s case, just function. Forget growth — for a nation like Britain, nothing works anymore, from the BBC to the NHS to transport or food or water systems. I’m not kidding: raw sewage is dumped in rivers, as a simple example. Villages ran dry this summer — and this winter, there are going to be blackouts. No public investment — forget growth, everything falls apart.
Just like in, say, Texas or Kansas. Britain’s fanatical leaders want to repeat the experiment those American states tried. But we know the results: they were catastrophic. America’s Red States, especially those which tried libertarian Grand Social Experiments, are the very places with some of the worst outcomes in the world, resembling actual failed states and poor countries on basic social measures from life expectancy to maternal mortality to the health of democracy. What kind of idiot wants to repeat that failed social experiment on their own country?
So. Britain’s ideologues want to pay for tax cuts on the ultra rich…by slashing the size of government to the bone…to fix the problem of low growth. But we know what slashing public investment does: exactly the opposite of fixing the problem of low growth — it kills growth. Even the IMF agrees with that, by the way.
Now. Dots. Fast forward a few months, maybe a year. Britain’s a country having a subprime-esque mortgage and housing and banking crisis. Vast numbers of people are being foreclosed on, because they can’t afford their homes anymore, let alone basic bills. And Britain’s leaders answer to that is to slash public investment.
What is all that really going to do? It’s going to cause a mega-crisis, that’s going to make what happened to Texas and Kansas look tame. As Brits falls into poverty, homelessness, despair, and ruin — and I mean the real thing, going broke — they’re going to find their public investment slashed to the bone. That doesn’t just mean they’re going to get little to no support when they need it most — it means the economy doesn’t have a hope in hell, really.
The vicious circle of poverty will accelerate, because without public investment to create large numbers of relatively stable jobs, what exactly are Brits going to do as they fall into poverty? You see, actual economics would tell us that at precisely such a moment — crisis — you need to stimulate an economy, which means creating things like jobs. But Brits are going to have the opposite of stimulus when they need it most — austerity. It’s going to be lights out.
This is the most catastrophic series of mistakes that a rich government has made since the Weimar Republic, by a long way. It’s one of the catastrophic series of any government, period, even in poor countries.
I think that Brits are still underestimating all this. It’s going to mean that even, for example, plenty of middle class families are going to fall into poverty and homelessness. Millions are going to be ruined for life. They will never recover, never again be able to afford homes, develop savings, live what they once considered a normal life. The structure of society — working class, middle class — is going to implode.
A tragedy of immense proportions is about to unfold.
Britain is staring down the barrel of economic ruin. The real thing. This is what a nation committing economic suicide looks like. But does Britain really understand how dire and serious the stakes are yet?