The UK has just been through a great economic and financial mess trying to put together the government it needs.
The recent chaos in the UK has grown out of a ‘new’ government which has tried to do a lot of things that people really didn’t want.
This government, under newly chosen Prime Minister Liz Truss, attempted to produce a “supply-side” economic program that emulated the former work of Prime Minister Margaret Thatcher.
The result? Financial markets collapsed.
Mrs. Truss had to back off. Mrs. Truss had to resign.
And, a new Prime Minister has been chosen.
And the financial markets have recovered.
The UK economy hasn’t grown as fast, but the UK economy is on the verge of a wave of rising inflation, which the Bank of England has already fought against.
Last month, the inflation rate in the United Kingdom exceeded 10.0%, a level not seen for forty years.
The UK bond market reacted. The stock market reacted. Things in the financial world have gotten quite uncomfortable.
The call, according to the editorial board of the Financial Times, was aimed at “putting public finances and the economy in general… on a level playing field while dealing with the squeeze on the cost of living, and to a credible tax and spending plan….”
This is the task facing the new Prime Minister Rishi Sunak.
According to the opinion piece, Mr. Sunak “has the experience and perspective to take control in this time of deep economic crisis.”
Perhaps the United States should take note of the British experience.
The Federal Reserve System in the United States is waging a battle against inflation.
However, the last rate of inflation in the United States was 8.2%, again a level not seen in the United States for about forty years.
But, even before the Biden administration took office, they talked about stimulus packages to support faster economic growth in the United States.
The presence of the Covid-19 pandemic has contributed to the expansion of economic programs that have graced the Biden administration’s agenda.
We can see that even as of 2014, the federal deficit as a percentage of GDP was declining. The pandemic and subsequent recession only made matters worse.
Another aspect can be considered the total debt as a percentage of GDP.
We can see that before the Great Recession, the total public debt of the United States was about 60% of annual GDP.
After the Great Recession, this ratio rose to around 100%.
And, now, the Biden administration faces a debt burden that exceeds 120% of GDP and continues to grow.
The United States is struggling with rapidly rising inflation and a mounting debt burden, much like what Britain was facing.
Unfortunately, the image we looked at is only a small part of the picture. What about the impact of the Russian invasion of Ukraine on this situation? What about the possibility of China invading Taiwan? What about the turbulent energy crisis, to which the Saudis seem to be adding something? What about supply shortages that don’t seem to be easing?
And what about other things that aren’t even on this list right now?
Policymakers face a host of problems as they try to rein in inflation without plunging the economy into a slump.
Britons were specifically hit by a political challenge, which sent bond markets into a tumble, which unsettled other major UK markets.
The Brits reacted and said, in effect, ‘No, we don’t want all that stimulation now, especially as we’re trying to get inflation under control’.
Perhaps the United States needs to listen to a small part of this message.
Mr. Rishi Sunak said on Tuesday,
“Our country is facing a deep economic crisis.”
He promised he would prioritize “economic stability and confidence”.
Above all, he would try to restore confidence.
In establishing that trust, financial trust is a big part of what needs to be restored.
Does the United States have anything to learn from this?
My answer to this question is obviously yes.
As I suggested in the first paragraph above, this period is a very chaotic one.
A lot of things don’t make sense. We have low unemployment rates. Business seems to be doing well. There is a lot of economic luminosity to be seen in the future.
Yet we face rapid inflation. We have many markets that are out of balance. We have lost a lot of people in the labor market as the participation rate has dropped. Schools are in trouble. Plus several other things we can mention.
Uncertainty dominates the economy and the world.
Maybe it’s time to take a step back and stop throwing “….” at the wall to see what sticks.
We’ve done it once in the past few years, and see where it got us.
Maybe right now we need to take a step back and try to push more and more stimulus into the country. Perhaps we should introduce some financial competence into the picture. Perhaps, more than anything, we need to build some stability and trust in the system.
Maybe that’s what the stock market would like to see?
Hopefully the British will set an example for us on how to return to stability and confidence. Wish them good luck !