Summary
- The British are making a new start with a new Prime Minister, Rishi Sunak, and a new charge to bring stability and trust back into the English economic picture.
- Maybe leaders in the United States need to learn a little from what Mr. Sunak is facing because, except for scale, the picture in the U.K. is not that different.
- Leaders around the globe have been pushing and pushing in order to drive their economies to higher and higher levels, but maybe they need to step back and focus.
- Maybe discipline and competence are what we need to look for right now rather than just stimulus and excess.
The U.K. has just been through a big economic and financial mess as it has tried to bring about the government that it needs.
The recent chaos in the U.K. developed from a "new" government that tried to do a lot of things that people really didn't want.
That government, under the leadership of newly chosen prime minister Liz Truss, tried to produce a "supply side" economic program that emulated the former work of prime minister Margaret Thatcher.
The result? Financial markets collapsed.
Ms. Truss had to back off. Ms. Truss had to resign.
And, a new prime minister was chosen.
And, financial markets recovered.
The British economy was not growing that fast, but the British economy is on the brink of a tide of rising inflation, something that the Bank of England has already been fighting.
This past month the rate of inflation in the United Kingdom was in excess of 10.0 percent, a level unseen for forty years.
The British bond market reacted. The stock market reacted. Things in the financial world became quite uncomfortable.
The call, according to the editorial board of the Financial Times , was for "the public finances and the broader economy...to be put back on an even keel while dealing with the cost of living squeeze, and a credible plan for tax and spending...."
That is the task facing the newest prime minister Rishi Sunak.
According to the opinion piece, Mr. Sunak "has the right experience and outlook to take control at a time of deep economic crisis."
The United States
Perhaps the United States needs to take some note of the British experience.
The Federal Reserve system in the United States has been fighting a battle against inflation.
However, the latest rate of inflation in the United States has been 8.2 percent, again a level that has not been experienced in the U.S. for about forty years.
But, even before the Biden administration took office, they have been talking up stimulus programs to support faster economic growth in the United States.
The presence of the Covid-19 pandemic contributed to the expansion of economic programs that graced the Biden administration program.
One can see that even from 2014, the federal deficit as a percentage of GDP was moving down. The pandemic and following recession just caused the situation to worsen.
Another look can be taken as the total debt as a percentage of GDP.
On can see that before the Great Recession, the total public debt of the United States was about 60 percent of annual GDP.
Following the Great Recession, this ratio moved up to about 100 percent.
And, now, the Biden administration is facing a debt burden that is over 120 percent of the GDP and growing.
The United States is fighting rapidly increasing inflation and a growing debt burden, not unlike what Great Britain was facing.
The Future
Unfortunately, the picture we have been examining is only a small part of the picture. What about the impact is the Russian invasion of Ukraine have on this situation? What about the possibility that China will invade Taiwan? What about the stirring energy crisis, something the Saudis seem to be adding to? What about the supply shortages that ado not seem to be letting up?
And, what about other things that do not even make this list at the present time?
Policymakers are facing a multitude of problems as they try to bring inflation under control without throwing the economy into a descent.
The British were hit specifically with a political challenge, one that threw bond markets into a fall, one that disrupted other major British markets.
The British reacted and stated, in effect, "No, we don't want all this stimulation now, especially as we are trying to bring inflation under control."
Maybe the United States needs to listen to a little part of this message.
Mr. Rishi Sunak stated on Tuesday ,
"Our country is facing a profound economic crisis."
He promised that he would prioritize "economic stability and confidence."
Most of all he would try and restore trust.
In building that trust, financial trust is a big part of what must be restore.
Does The United States Have Something 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 messed-up time.
A lot of things don't make sense. We have low levels of unemployment. Businesses seem to be going along pretty well. There is a lot of economic brightness to be seen in the future.
Yet, we are facing rapid inflation. We have many markets that are in disequilibrium. We have lost a lot of individuals from the work force as the labor force participation rate has fallen. Schools are in trouble. Plus several other things that we can mention.
Uncertainty dominates the economy and the world.
Maybe it is time to step back a little bit and not just keep throwing "...." at the wall to see what sticks.
We've done that once in the last several years, and see where it has gotten us.
Maybe right now we need to step back and quite attempting to push more and more stimulus into the land. Maybe we need to introduce some financial competence to the picture. Maybe we need, more than anything, to build some stability and trust into the system.
Maybe this is what the stock market would like to see ?
Hopefully, the British will set us an example of how to return to stability and trust. Let's wish them the best of luck!
For further details see:
Can The U.S. Learn From The U.K.? The New Experiment