Is Liz Truss the last person on the planet to believe in Trickle Down economics?
As we trek down to Munich for the Expo REAL, spare a thought for the good denizens of the UK, who saw their country being practically washed down the fiscal toilet last week. Were it not for the unwilling intervention of the Bank of England, forced to pump liquidity into financial markets against its will - and against its specific plan to actually tighten the monetary reins imminently - Britain might have been looking to the IMF for an emergency bailout.
The country is not out of the woods yet. The next week will tell us a lot about whether international investors still believe in the business model of prime minister Liz Truss and her Chancellor, Kwasi Kwarteng. If this was a poker game, it’s called ‘going all in’, putting all your chips in the pot and eyeballing your opponent, daring him to re-consider whether his own strong hand is really that strong - and to imagine the consequences if he’s beaten.
The UK government may feel it has no choice. It’s trailing the Labour party by a large margin, and there are elections in two years. After twelve years in power, and the debacle of the Johnson years fresh in voters minds, this is Liz Truss’s do-or-die moment. If she burns the house down, she might think, well at least she made it to the top job before she and her reckless colleagues get finally thrown out, to deservedly languish in the wilder- ness for at least a generation.
A cartoon in the New Yorker magazine some years ago showed a tramp sitting on the pavement, with a little placard above his collection box. The placard had a big black arrow pointed downwards, with the instruction - “Trickle Down Here, Please”. Liz Truss’s gamble is that her giant unfunded tax break for the rich will lead to them all starting new businesses that will trickle down to lift all boats, and so self-fund her massive giveaway.
Now it’s possible that the world’s future Elon Musks and Jeff Bezoses will make their way to the entrepreneurial paradise that is modern Britain, and will ultimately be trickling their wealth down to all the great oppressed - although some might think Brexit was designed to pre- vent that happening. More likely it is that wealthy bond traders will relish the huge reduction in their tax rates and their freshly uncapped bonuses, and merely add to the demand for ‘Selling Sunset’-style property brokers, house-cleaners and Ferrari hub- cap polishers.
Nothing wrong with that. All work is good. London has plenty of these people already. But it seems a far cry from the great Levelling Up, which was supposed to spread economic opportunity into Britain’s less privileged areas, and make Britain a highly-educated, high-earning economic powerhouse, a magnet for the world’s brightest and best.
The rise in property prices has always been heralded in Britain as good news - as indeed, for a nation of property-obsessed home-owners, it HAS been. For most, it represents their pension, an asset they can sell and - in the old days - maybe use the proceeds to move to the Costa Brava for a sun-blessed retirement. Inflation was good - it helped to write down the value of their debt more quickly. Sterling could periodically devalue - it did so versus the Deutschmark twelve-fold since the Second World War. But if your income and expenses were in sterling, that didn’t really matter.
Even in the UK it’s become increasingly difficult to get on to this so-called ‘housing ladder’ with vast swaths of the population cut off from any access to a mortgage. Now thousands of those ‘fortunate’ enough to have one are facing a wave of forced sales as interest rates soar, adding more than 5,000 pounds a year in repayments for those coming off a fixed-rate mortgage deal. That’s before they face the wave of other higher costs in their consumption, including thumping energy bills. Anger is mounting, as the pretense of solidarity with more fortunate members of society is increasingly unveiled as a sham.
As we head to Munich for the Expo Real, it is dawning on people that this time, it really might be different. Indeed, it IS different, things are changing fundamentally. So much so that the transaction market has effectively dried up as buyers and sellers try to figure out what they’ve got, and what they want. This is hugely complicated, as it’s not just a question of price, but also of far-reaching energy and other commitments they may be entering into with only a fuzzy idea of what the costs and risks might be.
The numbers and calculations that investors have conjured up on their Excel spreadsheets in the benign days of interest-free borrowing, when ESG was just a twinkle in the EU’s eye, and when cheap-ish energy was a given and controlled factor, are no longer valid. Losses for investors whose assets don’t tick a lot of the right boxes will be painful and enduring, and the trickle-down effects will be with us for many years.
There is almost a neediness about this year’s Expo Real, we can feel it in advance. It’s about the need to find orientation, to gain a sense of where prices might be at when people have the courage to trade again, and perhaps to feel a sense of solidarity among fellow industry participants. Because the omens are for a greater division among those posi- tioned to gain, at the expense of many who are set to lose.
Some will shrug, and say that’s life. Maybe. We’re seeing the first casualties already. Terragon, a leader in developing senior serviced housing, is a prominent casualty, but the list of developers who now can’t escape the clutches of mounting economic disaster is rising rapidly. There is a big clear-out to come, and the process will take years to unfold.
For potential German homeowners, the recent interest rate rises - with likely more to come - means they can kiss that dream of home-ownership goodbye, finally. That, and mounting housing pressure amid further rent rises, eats away further at the social contract that has held German society together in the post-war period, it leads to a crum- bling of solidarity with other members of our liberal democracy, and further increases the likelihood of civil strife and revolution - yes, even in Germany.