Politics and Economics

by

Can the Tories Retain Truss t?

No matter how much they talk about global economic forces or try to present the energy cost
intervention as a sign of how they are focused on the needs of working people, the current
government has lost credibility with both the British electorate and lenders.

Last Friday the Prime Minister and her Chancellor launched a “special economic operation”,
which was to lead a national charge to growth, securing this within sufficient time for it to
pay for the reductions in taxes that were needed to achieve it. It was not a budget, so there
was no need to have it independently reviewed by the Office for Budget Responsibility,
despite its enormous scale.

To be fair, it was not a budget. Anyone who looks at a household budget knows it has two
sides. One side is about expenditure and the other about income. And as Mr Micawber in the
Charles Dickens novel David Copperfield said: 
“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six,
result happiness. Annual income twenty pounds, annual expenditure twenty pounds
nought and six, result misery. “

We seem to have gone for the latter option, although we have added many, many noughts to
the excess of expenditure over income.

Elsewhere, I have made the point that there are fundamental differences between national
finances and household finances, the most obvious being that households do not print money,
governments do, via banks. Governments can run up significant deficits and even fund some
of these which is what Quantitative Easing is partly about.

However, governments that simply print money are destined for high, higher and eventually
hyper inflation. So some recourse to the reality of the money markets is necessary, and this
means borrowing money from investors. And, like all credit agreements, the small print, or
quickly delivered “terms and conditions apply”. This means lenders will charge a premium if
they feel your ability to repay or, more broadly, your credibility as a borrower is weak.
If your strategy for repaying the loan is based on a recoupment of investments at Aintree,
Cheltenham, Newmarket or Goodwood they may feel obliged to charge a significant
premium.

If we look back when Liz Truss was selected as Conservative Party leader she announced,
after one week, a massive support package for domestic energy consumers costing tens of
billions of pounds.

This did not spook the markets. Investors could see that urgent action was needed and that
any responsible government would have to respond to the twin problems of genuine hardship
for its citizens and economic damage to its businesses.

What spooked the markets was that this logical action was followed by radical tax cutting,
further expenditure, and an explicit statement that this would all be covered by borrowing
with no evidence-backed explanation at all as to how it would be paid for.

It seemed growth was the problem but it was also the solution. However, the magic formula
that had eluded governments around the world about how you secure the transition from
problem to solution was not forthcoming.

But worse than this, the people who may have been able to provide an assessment of the
credibility of the borrower were either sacked, as in the case of Tom Scholar the most senior
civil servant in the Treasury with direct experience of dealing with the 2008 financial crisis,
or told their help was not needed (the Office for Budgetary Responsibility, obviously the clue
is in the name) or denigrated as slow to act (the Bank of England).
It seems that they did not want to study the form, listen to the tipsters, or even count the legs
on the horses. They just wanted to go all in and bet the farm on black. Unfortunately, what
came up was red; red warning screens in the currency markets, the inflation predictions, and,
worst of all, in the cost of government borrowing.

The scale of the incompetence triggered a problem in the pensions industry as the Liability
Driven Investment strategies had the rug unceremoniously pulled out from under them. The
response of government spokespeople that this was an arcane technical issue in the structure
of the pension funds ignores the fact that it relates to some £1.5 trillion. That is a big number.
Roughly, two thirds of GDP.

The risk attached to this was so significant it could have spread problems to other parts of the
global financial markets. And we know how quickly problems can snowball once they start in
finance which is all about trust. The International Monetary Fund (IMF) was already
concerned about contagion.

Liz Truss must have had the shortest honeymoon period of any Prime Minister. In less than a
month she has lost the trust of the financial markets, lost the trust of the British people, with
polls giving Labour a 33% lead over the Conservatives, and she is fast losing the trust of her
MPs.

Boris Johnston was not Donald Trump and Liz Truss is not Vladimir Putin. The latter
individuals are in a class of their own in terms of moral degradation. In terms of
incompetence however, the PM is giving Putin a run for his money.

It has taken Putin eight months to destroy any trust the West had in him. His “special military
intervention”, which began life as a dash for Kiev, failed. He has been forced to change his
objectives but stubbornly persists in a strategy which is ruining his economy. And now he is
starting to loose the trust of the Russian people who are leaving the country in droves. Despite
being a ruthless autocrat his chances of remaining in power reduce by the day.

Constancy of purpose and determination are good things in leaders. Unless, of course, that
constancy and determination are focused on doing the wrong thing. If you dismiss those who
are experts, precisely because they are experts, or see those who challenge you as closet lefties simply trying to undermine your strategy, you may be right, but you may be wrong.

And when you are playing with a nation’s future you need to be damned sure you are right.
It looks as though Liz Truss is wrong. Worse, she does not seem to see this or is not willing
to recognise it.

There are only two credible options. One is to reverse the tax cuts in a humiliating
climbdown. The second is to implement another round of austerity which would be breaking
promises and is probably impossible to deliver politically.

Whether this would recover the PM’s credibility with the markets is a moot point. It is
unlikely to recover the trust of the citizens of the UK. This means it is unlikely to recover the
trust of the Conservative’s Parliamentary Party other than the extreme fringes of the right.

Either, Liz Truss knows something that the vast bulk of those that ought to know about these
things (the Treasury, the Bank of England, the IMF, the economics profession) do not know,
or she is wrong. Are those who think she is right willing to bet their house on it?

Rather than a triumph of determination leading to a national growth rate of 2.5% per annum,
last Friday is likely to be seen as the day the Conservative party lost the trust of the British
people in their economic competence. And it may be the day which marked the start of their
loss of Truss.

by

“Ukraine has not yet perished,…”

The title to this post is the first line of the Ukrainian national anthem and has an incredible resonance with the heroic efforts against overwhelming odds.

The people of Ukraine have not just resisted the unprovoked attack ordered by President Putin, they have fought back. It is difficult to know the truth of the Russian losses but at best they are bad. Nato estimates are between 7,000 and 15,000. Those losses have occurred in the space of one month. It compares with around 15,000 deaths in 10 years of war in Afghanistan.

Body counts in war are logistically difficult and as part of the propaganda campaign subject to significant variation. However, what cannot be gainsaid is that the planned blitzkreig by an overwhelmingly large military force has not turned out as planned. The incredible bravery and determination of the Ukrainians has not just mounted an incredible defence, in many areas they seem to have taken the battle to the enemy.

Incompetent though they have demonstrated themselves to be it is difficult to believe the enormous advantages in terms of resources and manpower they can draw upon will not lead to an ultimate Russian victory. Any views to the contrary depend upon a very difficult transfer of power in Russia which there is little sign of at the moment.

Given this, much weight is being placed on the peace negotiations occurring in several locations and at different levels. It is said real progress is being made, albeit slowly, and both sides are tempering their demands to more realistic levels. Agreement is tantalisingly close, some believe. In parallel some safe passage routes out of cities in the North are enabling citizens to escape the fighting.

Ominously, there is no safe corridor out of Mariupol. The bombardment of that city has been relentless and has effectively raised it to the ground by all accounts. The people trapped inside have no running water, declining food supplies, no heat or light. The conditions can only be imagined.

Mariupol is absolutely vital for both Ukraine and for Putin. For Ukraine it is a critical part of its economic infrastructure providing a route to market for much of the countries exports. For Russia it provides a land corridor to the Crimea seized in President Putin’s last illegal war.

If there is a peace deal I suspect it will only come after Mariupol has been taken which will be a blood bath. President Putin will claim any peace agreement should respect Russian control of Mariupol, and withdrawal of Russian troops will be subject to this. This will provide him with his land corridor to consolidate his earlier invasion and provide a way to strangle Ukraine’s economy in preparation for his next offensive in 5-7 years time.

It is not a peace Ukraine can accept, nor the West.

Political leaders in the West are rightly fixated on avoiding a world war that may go nuclear. My fear is this fixation, and the avoidance of Russian / Nato conflict it entails, may actually result in what they are attempting to avoid. The unbelievable sacrifice of the Ukrainian people will then have been for nothing.

President Zelensky’s calls for a no fly zone have fallen on deaf ears. He has now asked for demonstrations of solidarity in the West. We should paint the nation Blue and Gold.

by

Is Jaw Jaw always better than War War?

For over two weeks now we have seen a completely unprovoked invasion of a European democracy descend into an ever more brutal war of attrition. Where the incompetent application of overwhelming force has resulted in the aggressor having to resort to ever more inhumane tactics to try to terrorise the nation into surrender.

The West’s response has been to provide peans to the brave people of Ukraine, weapons to defend themselves, economic sanctions, more severe than anyone could have imagined possible, and a single red line around the borders of Nato. From the start it has made clear it will not cross that red line with any offensive capacity for fear of starting World War Three and a possible nuclear war.

Such a firm stand against entering into battle against President Putin is understandable. For some, with sons of conscription age, new grandchildren and living in port cities the fear of war creates a depressing background. The everyday, taken for granted, joys of life are suddenly thrown into sharp relief as the TV provides example after example of how that can be taken away in a blinding flash of shells or rockets.

The consensus seems to be this is a war that, ultimately, President Putin cannot win. The incredible bravery of the Ukrainian people, supported with weapons from the West, economic sanctions against Russia, personal sanctions against Putin and the oligarchs he has created, will lead to the ultimate victory of Ukraine. Sadly, the country and its people may be devastated in the meantime.

The optimistic case is that President Putin realises the mistake he has made, or key members of the Russian elite force him to see that error, or the return of body bags cuts through state propaganda and provokes a popular uprising.

In the less optimistic scenario Putin terrorises the Ukraine into surrender. But having “won” he then has to retain control of a country of some 40m people, pretty much all of whom hate him, and, based on evidence to date, will not meekly accept some puppet government. A partisan struggle demanding huge military investment from a country whose economy is being devastated by sanctions may mean increasing numbers of body bags and reducing bread will eventually trigger a change in leadership, negotiations, the withdrawal of Russian troops and free and fair elections.

In both of these scenarios the Ukrainians have to be sacrificed to the greater good of European peace. There is a cruel logic to this which many serious people are expounding at every opportunity. These people rightly condemn the strategically vacuous demand that “something must be done!” and exhort people to adopt a real politik approach characterised by cool heads and clinical thinking.

The UK’s position on this was articulated last week by the Armed Forces Minister James Heappey on the Radio 4 Today programme. He was being asked about what should happen if President Putin did adopt the use of chemical weapons. He responded that “President Putin needs to be clear” that use of such weapons is the “most despicable thing anyone can ever imagine”.

I fear the Minister underestimates the capacity of President Putin’s imagination. He must also have forgotten the President’s support for President Assad when he used barrel bombs of chlorine gas against women and children. Finally, one suspects the only thing President Putin is clear about is the effectiveness of such tactics in terrorising people into surrender.

The Minister was then pressed whether such action would constitute a red line? His response was he did not think it helpful to get into where red lines sit right now. So Putin just has to guess. From the very clear statements made by leaders of all the leading countries he may be forgiven for thinking “the” red line remains around Nato.

In summary then, the consensus view of serious people seems to be: President Putin must not be provoked into a wider European conflict; he must be provided with a face saving way out; a negotiated settlement is the only way forward; a negotiation which gives Putin something eg. the Crimea or the Donbas or a guarantee of no Nato membership for Ukraine, or all of the above. Max Hastings, a highly respected military historian was arguing this case on the BBC’s PM programme, advocating the realistic way in which President JF Kennedy compromised with the Soviet leader Nikita Krushchev through the Cuban missile crisis as a model.

Whilst all this passes the cold and rational test, is it right?

If we start by considering the chances of a negotiated settlement, things do not look good. Firstly, each time representatives of Ukraine or the West have met with Russia the compromise proposed is unconditional surrender. Secondly, what they say does not correspond with what they do.

This has two manifestations. One is classic double speak like the comments of Foreign Minister Lavrov last week who said, in clear terms, Russia “has not attacked Ukraine”. It is difficult to imagine how much worse it would be if they did. The other is agreeing one thing and doing another. For example agreeing ceasefires to allow civilians to leave cities under attack, only to break them within hours. One might almost think this was a conscious tactic to raise and then dash hopes in order to further undermine the morale of the Ukraines.

The proposal that an agreement be negotiated as Kennedy did with Krushchev looks difficult. Firstly, Krushchev is a very different character to Putin and crudely he did not have the despotic authority based on terror his predecessor Stalin or his successor Putin had and have respectively.

Second, the deal that Kennedy proposed was a secret deal to withdraw US missiles from Turkey. Those missiles were not moved for the best part of a year after the Soviet capitulation. What’s more the secret was kept by both sides for 20 years.

A secret deal is no good for President Putin, he has painted himself into the victory-at-all-costs corner. It is an irony of history that the retreat from Moscow in 1812 was the beginning of the end for Napoleon, for Putin the retreat to Moscow would be the same for him.

President Putin has to win and given the incredible bravery of the Ukrainian people the only way he can achieve this is by by relentless shelling, the threat or use of chemical weapons, the importation of a ruthless mercenary army and hand to hand fighting street by street with massive military casualties on both side and huge numbers of Ukrainian civilian casualties. This is a price he is more than willing to pay

But what if the price was higher? Suppose the West said the breaches of the wars of law are such that fellow democracies must intervene and create a no fly zone for foreign aircraft over the Ukraine. What would Putin do?

We know President Putin is a ruthless tyrant who brooks no opposition at home. Controls the media and the internal narrative. Lies with no conscience abroad. Uses ruthless terror tactics against civilian populations to win wars. Murders or has locked up any that oppose his rule. And that he has a fine line in threatening rhetoric against Nato. However, he is not mad?

For the past ten years he has prodded and poked the West with cyber attacks, election interference, assassinations, false flag provocations and outright invasions. Whilst these have been increasingly outrageous they have always been finely calibrated to avoid a Western response which would threaten his position. Until now.

President Putin must know that he has crossed a line. He may feel his best hope is bring back to the people of Russia a territorial victory. Then close the shop and try to ride out the sanctions. He may judge time to be on his side if he could do this as the unity of the West would no longer have the nightly reinforcement of a terror war on TV.

The West has always been on the back foot responding to President Putins actions. The same is happening now in the war in Ukraine as its conduct has degenerated over time. Now it is plainly and simply about terrorising the civilian population in the hope they will eventually put pressure on President Zelensky to surrender and stop the pain.

The threat of a no fly zone would change the shape of the game for Putin. If implemented it would massively undermine his war effort, at the very least extending the period. Time would then become Putin’s enemy. More body bags, more time for sanctions to hurt. The possibility domestic restiveness becomes louder and braver and ultimately beyond the control of even the Russian state. There may even be cross overs into other states. Both Belarus and Kazakhstan have had to take ruthless steps to quell protests recently.

All this might make President Putin feel that the best option is actually to negotiate a face saving settlement. A real one which does not start with unconditional surrender. Which, in return for a withdrawal to pre-2014 borders would secure: a guarantee about Nato military deployments away from the Russian border areas; joint pre-notification of military exercises; agreement around missile locations in Europe; and a, say 5 year, freeze on Ukraine’s Nato membership negotiations.

Obviously, this would be a massive defeat for President Putin, and it would weaken him. However, it can be spun internally as about securing Russia’s borders without having to kill any more of their brothers in the Ukraine and it buys him time.

Of course serious people will say, but if he is cornered he will lash out and may use nuclear weapons. That is true and it would be an absolute catastrophe. The only thing that would be worse is, if the view of those serious people about the long term victory of the Ukraine, or rather the West, is correct, President Putin will at some point have his back to the wall and he will lash out then. Then we would have stood by allowing the people of Ukraine, not just to fight for democracy, but to die for it. And we would still have a nuclear conflagration.

The West’s position is based on a strict utilitarian ethic with a single red line. It is logical and unimpeachably rational. But if feels wrong. Heartbreakingly wrong morally.

by

Democracy Matters

Against a nation with the second largest number of nuclear missiles and one of the largest armed forces in the world Ukrainians are preparing to fight in the streets of their capital to defend democracy. Given the significance of this for Putin’s own future, without a Russian coup, their resistance is almost certainly doomed to bloody defeat.

However the capture of Kyiv will only create a running sore of opposition to Putin which may well rally others within Russia. This will be reinforced by the country becoming a pariah state with sanctions bleeding the country slowly but surely over time.

The swiftness and scale of the western response and the contrasting laboured pace of the invasion have probably taken Putin by surprise. His fellow “strong” leaders in Hungary and Turkey have abandoned him and even China is far from offering unqualified support.

There are almost certainly members of the officer class in Russia and members of his golden circle of oligarchs who will be wondering where Putin is leading his country. The destruction of Kyiv and the associated bloodbath that seems inevitable will be a hollow victory and will raise even more questions amongst ordinary Russians.

The west’s strategy seems to be to sacrifice the Ukrainian people on the premise that they cannot risk a nuclear confrontation, and the hope sanctions and the ostracisation of Russia will lead to some change in Putin or a change of Putin. Given his actions nuclear escalation can certainly not be ruled out and so caution is wise.

However, if he takes Ukraine and creates a vassal state and then starts military “exercises” on the border with Finland what should the west do? Does the bloody destruction of every non-NATO country in Europe become the price to be paid for “peace”. Do we risk deterrence becoming a one way street?

The future for Ukraine looks bleak. They are on the front line of democracy. If our strategy is as set out above then every support we can provide should be given to its people. Weapons both now to support its defence and in the future to support its opposition. Humanitarian aid to meet whatever disaster Putin creates, and safe haven for the refugees fleeing the country mostly, women and children. And we should be ashamed that a Minister of our Government suggested they apply for potato picking visas.

Sadly our country has adopted Churchillian rhetoric about defending democracy but applied Chamberlainian procrastination in its actions to support those that are doing the work. We have been on the coat tails of pretty much the rest of the west. Germany acted decisively and swiftly at real risk of negative economic consequences for its country.

At the moment this sadly has the look of a war of attrition which will not end with the bloody destruction of Ukrainian cities and the murder of its leaders. Ultimately, the only resolution will be the deposition of Putin. The longer that takes the worse this will be for Ukraine, for Europe, and for Russia.

Ukrainians are providing an object lesson in how valuable democracy is for people who have only relatively recently achieved it. Overnight they have transformed themselves from ordinary citizens to resolute defenders of democracy fighting for freedom. Many have been separated from their families many of whom have, in the blink of an eye, become refugees.

In much of the west, 75 years of democracy have made us complacent about its permanence and even its value. Some arguing enlightened dictatorship would be better. What people usually mean is an enlightened dictatorship doing what they think is right. The problem is once you get a dictator it is what they think is right which matters, and there is little you can do about it.

Democracy does not always secure the best leaders but just occasionally it does. Volodymyr Zelensky has risen above leaders across the west as someone who genuinely is willing to die for his country. He can be under no illusion as to what will happen to him if captured by Russian troops.

Putin is where you can end up when you have no effective way of getting rid of a leader.

If we are not going to fight with the Ukrainians, we should give them unstintingly of our support in every other possible way, even when it costs us. And we should humbly salute them and their leaders for their bravery in defending their country and defending democracy on our behalf.