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5 days ago
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A maverick economic policy announcement from a self-styled disruptor plunges the country’s currency into freefall and puts rocket boosters behind the cost of government debt, prompting warnings of an economic nuclear winter and forcing a pretty undignified U-turn.
If, on top of general concern, there has been a nagging sense of deja vu in Britain over the past 24 hours, then the ill-fated 49-day reign of Liz Truss as the UK prime minister may well be to blame.
“This is Donald Trump’s Liz Truss moment,” tweeted Ed Davey, the Liberal Democrat leader (alternatively known to followers of Elon Musk on X as that “snivelling cretin”).
When Truss’s chancellor, Kwasi Kwarteng, announced his “mini-budget” in the autumn of 2022, it was initially met by some with hearty cheers and backslapping. The Daily Mail and the Daily Telegraph were among those made giddy by a “real Tory budget” that slashed taxes, just as in recent days some have celebrated the audacity of the US president’s decision to wage a trade war with the rest of the world.
Truss’s move was not, however, balanced with spending cuts or indeed a reassuring official forecast that gave the markets some sense that the government knew what it was doing.
A meltdown in the bond markets saw state borrowing costs rise by one percentage point in four days and an almost immediate rise in mortgage rates. The chancellor was sacked, a new one was ushered in to reverse most of the damaging policies, and Truss was out on her ear soon after.
The steadfast determination of Keir Starmer’s chancellor, Rachel Reeves, to stick to her fiscal rules despite huge spending pressures is in large part down to the Truss crisis.
For some, Trump’s gameshow host performance in the White House Rose Garden, as he unveiled the bumper tariffs on “liberation day”, had all the hallmarks of a Truss-style disaster in the making – and one on a rather grand scale.
Trump’s theatrics were, inevitably, celebrated by his most dedicated supporters as a genius move right out of his Art of the Deal book. But the bond markets gave, as they always do, the most clear-eyed view possible from people with skin in the game: they absolutely hated it.
Confidence in the US economy plummeted as investors dumped government debt, normally a safe haven. Things only got worse as China’s announcement of retaliation pushed Trump to further up the ante with tariffs of 104% on Chinese goods.
Like Truss, Trump tried to hold the line for a bit, playing chicken with the markets. The size of the US economy offered him rather more protection than that enjoyed by the then British prime minister. But there was no hiding place from the political and economic reality facing the White House.
Figures such as the former Treasury secretary Lawrence Summers warned of a financial crisis. Capitol Hill Republicans who had backed Trump to the hilt in the past were suddenly critical.
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Trump ordered a 90-day pause on the highest tariffs on every country bar China, noting with uncharacteristic understatement that people were “getting … a little bit afraid”.
“I thought that people were jumping a little bit out of line,” he said. “They were getting yippy … The bond market is very tricky, I was watching it … people were getting a little queasy.”
What happens next? In Britain, Truss was doomed. The parliamentary system offered MPs an emergency lever to pull. The American system offers no such fallback option but, again, the outsized role of the US in the global economy possibly allows the Trump administration a little more leeway. A standard 10% tariff remains on imports and the White House is acting as if all is going to plan.
“This will go down in American history as the greatest trade negotiating day we have ever had,” said Trump’s senior trade adviser Peter Navarro, widely spoken of as the brains behind the tariff plan. “We’re in a beautiful position for the next 90 days”.
As ever, all the bluster will mean nothing to the markets. As Truss discovered, they will make their judgment in due course.
