Rinse and repeat – Truss chaos – the new benchmark

For years, those who want selective access to government spending benefits (like the military-industrial complex and other parasitic sectors), while claiming the government cannot afford to provide adequate income support to the most disadvantaged citizens have used various ruses to give an air of authority or legitimacy to their claims. So in the UK, the lie in 1976 by the then Labour government that it was going to have to borrow from the IMF to stay solvent has been regularly wheeled out. In Europe, it was the ‘tournant de la rigueur’ (austerity turn) introduced by the French government of François Mitterrand in 1983 that effectively cancelled the commitment to the progressive – Programme commun – that is often cited as a demonstration of the limited capacity of governments to resist the global power of the financial markets. The fact that it was progressive governments that instigated these events made it more emphatic – the Left essentially swallowed the fictions introduced by the Right and the corporate elites that governments were now powerless against the power of the financial markets. The macroeconomic contest was essentially ceded to the conservatives and it has been that way since. There is now a new ruse that the elites are using that the progressives are also spreading – the Liz Truss Ruse. This apparently tells us that governments must appease the financial markets or face currency destruction and rising bond yields. Like its predecessors, there is no validity to the claims. But the Left is so bereft that it cannot see through the smoke and mirrors. And that is why the world is in the parlous state that it is – the contest of ideas is non-existent. It is a case of rinse and repeat – except all is happening is lies and posturing is being recycled.

Liz Truss’s brief occupation of the Prime Ministerial position in Britain in 2022 demonstrated what happens when a person is so far out of their depth.

Her policy approach was really just more-of-the-same in a long-line of ‘trickle-down’ economics that began its British life with Margaret Thatcher’s postulation that a ‘social market economy’ would be achieved by providing more largesse to the wealthy who through supply and demand forces (the ‘market) would ensure the benefits permeated the entire social structure down to the weakest citizens.

The path to achieve this end required widespread deregulation, privatisation, outsourcing and above all, large tax cuts to the highest income earners.

The policies that have been advocated by both sides of British politics since – in one way or another – a consistent with that ideological perspective.

The fact is that there has never been any evidential support for these types of policies.

Indeed the economic performance of the US and UK economies as a result of Thatcher’s policies and those of Ronald Reagan who espoused the same nonsense were poor by historical standards.

I remember Monetarists in academic departments I was working in or studying in as a postgraduate student at the time claiming that the reason the policies were failing was because the Thatcher and Reagan didn’t go hard enough.

Reagan’s budget director at the time, Dave Stockman wrote in his own 1986 book about this period (‘The Triumph of Politics: Why the Reagan Revolution Failed’), that:

In some basic sense, however, the new supply-side doctrine was but a reincarnation of my old social idealism in the form of a new and, I was inclined to think , more mature ideological garb …

We viewed the supply-side doctrine as all-encompassing. It implied not merely a tax cut but a whole catalogue of policy changes, ranging from natural gas deregulation, to abolition of the minimum wage, to repeal milk marketing orders, to elimination of federal certificates of ‘need’ for truckers, hospitals, airlines, and anyone else desiring to commit an act of economic production. It even encompassed reform of the World Bank, and countless more …

In essence, our capitalist economy’s natural capacity to expand and generate new wealth and societal welfare was being badly hobbled by the sweeping anti-supply and incentive-destroying policies of the modern state …

The supply-side solution thus required the radical dismantling of state-erected barriers to economic activity – punitive tax rates, as well as all of the other misbegotten enterprises of the Second Republic.

So why did it fail so badly?

Stockman wrote that:

The true Reagan Revolution never had a chance … the spending reductions needed to pay for the tax cuts had turned out to be even bigger and tougher than I had originally thought … [they required] … a full-frontal assault on the American welfare state … [and] … complete elimination of subsidies to farmers and businesses.

So, the old line – we didn’t go hard enough.

But it is true that in his book he admitted that societal constraints would never allow such a ‘radical’ policy agenda as he originally conceived to ever see the light of day.

Further, they didn’t understand the cycle very well and couldn’t work out why the deficit was rising when they were cutting taxes and spending.

Stockman, by the way, proved to be inept at predicting even the immediate course of history.

He also wrote in his 1986 book that:

If we stay the course we are now on, the decade will end with a worse hyperinflation than the one with which it began.

And now, in 2024, that history never eventuated and, if anything, the US continued to follow more or less the same ‘course’ over the intervening period.

These ‘hyperinflation’, ‘debt chaos’, ‘insolvency’ claims are regularly repeated by characters who appear to have attention deficit disorders – always wanting to be in the media pontificating about how they know better.

I have written extensively about how ‘leading’ US economists were very vocal during the 1990s about how Japan would run out of yen because the financial markets would never tolerate the high deficits and expanding public debt.

They were uniformly wrong about everything.

Anyway, Truss was another of these supply-siders who hadn’t caught up with reality.

In her ‘Oral statement to Parliament’ on September 8, 2022 – PM Liz Truss’s opening speech on the energy policy debate – Truss outlined her ‘economic plan’ to reduce regulation, particularly in the energy sector to give “investors the confidence to back gas as part of our transition to net zero”.

In the subsequent ‘mini-budget’ delivered by the haphazard Chancellor Kwasi Kwarteng on September 23, 2022, they proposed a “real, Tory budget” (in the words of the Daily Mail, which would have delivered the largest tax cuts to the top end in 50 years (1972).

What happened next?

Well, the financial markets decided to make some money and sterling fell sharply against the US dollar and long-term government bond yields rose sharply, almost immediately after the mini-statement was delivered.

All sorts of horrendous headlines appeared – ‘worse crisis since Suez’ etc.

What is not often made clear in the media is that the Bank of England raised rates modestly the day before the mini-statement was delivered, which clearly disappointed all the short-sellers that had bet on even higher rates.

The IMF claimed that the fiscal proposals would jeopardise the Bank of England’s anti-inflation campaign, even though the rate hikes were unnecesary given the nature of the inflationary episode.

Rate hikes did not make people better from Covid, nor did they stop Putin!

Anyway, the Truss failure is the new reference point that opponents of fiscal interventions are using as if the behaviour of the financial markets can be used as a unbiased arbiter in whether fiscal policy is sound or otherwise.

A moment’s reflection would make clear that the sort of policies that Truss/Kwarten proposed were favourable to the financial market elites, rather than threatening.

Which suggests that the motivation of the short-sellers who pushed the currency down really had nothing to do with a negative assessment of the policy stance.

As I have written before, the financial markets prey on weak governments.

They knew that Truss had a precarious hold on power and would shift position quickly to entrench her position.

Under those circumstances, the financial markets have the capacity to wreak havoc.

If Truss had have been more solid in her post and stood up to the short sellers, in the way the Bank of Japan and the Cabinet Office in Japan does, then the markets would not have been able to create the chaos they did.

The intervention of the ‘markets’ was all about profits rather thana an assessment of whether the fiscal policy was appropriate or not.

As it happens, the mini-statement was ridiculous, but that is another matter all together.

Anyway, we are now stuck with the Truss effect.

Even progressives repeat the fiction.

When I was in London recently, I was asked by several people, what progressives could do when it was ‘obvious’ (not!) that the financial markets would punish a progressive program.


Rinse and repeat.

On Tuesday (March, 26, 2024), the Financial Times published an article from its correspondent in Washington – US faces Liz Truss-style market shock as debt soars, warns watchdog – proving my point.

Over the last few months a veritable parade of financial market types (Larry Fink, Jamie Dimon, Mr Independent Central Bank boss, Jerome Powell, and others) have been predicting a total meltdown of the US government finances.

The latest article on this theme appeared today (March 28, 2024) – Larry Fink joins Jamie Dimon and Jerome Powell is sounding the alarm on ‘snowballing’ national debt: ‘The situation is more urgent than I can ever remember’.

America has “snowballing debt” and is:

… on course to end up in a crisis reminiscent of Japan’s lost decade, and Washington cannot take for granted the notion that investors will continue to fund its fiscal deficit forever.

Let me state here and now – that prediction will never come to fruition even if you believe that the financial markets actually ‘fund’ the net spending of the US government, which is itself a falsehood.

The Financial Times article effectively rehearses the most recent input from the Congressional Budget Office in the US, which has one of the worst track records of all these institutions, in terms of predicting the future

They continually exhibit ‘systematic bias’ in their forecast errors.

Everybody makes mistakes in their forecasts.

But when the mistakes are biased in one direction consistently (for example, spending cuts will not damage employment much and then employment collapses) we know the underlying framework is defective.

The CBO told the FT that:

The danger, of course, is what the UK faced with former prime minister Truss, where policymakers tried to take an action, and then there’s a market reaction to that action.

Rinse and repeat.

Truss is the new fictional benchmark.

Various people interviewed for the FT article demanded “fiscal rectitude” (presumably not cuts that would endanger their jobs) or a reduction in “deficits substantially” to pay for the ageing society – another fictional narrative.

And the CBO boss revealed just how far off the mark he is in understanding anything much when he told the FT that:

We need to borrow from foreigners, because foreign capital helps keep interest rates low in the US … But there’s two sides to it, in that the cash flowing overseas means us losing national income. On the other hand, not having the capital coming in for us to borrow — boy, that would be even worse.

The US government spends US dollars.

China does not produce US dollars.

The only way they can get them is by running large surpluses against the US (or other surpluses where the exchange is in US dollars).

The US government doesn’t need to borrow from China or anyone else for that matter.

The Chinese etc buy the debt because they have massive stockpiles of US dollars after sending net real productive resources to America (net exports) – resources their citizens are deprived of.

What other option have the Chinese got?

They could convert the dollars to another currency and take exchange rate losses given the scale of the foreign exchange transactions would likely promote a depreciation in the dollar against the bi-lateral currency.


Anyway, progressives and conservatives alike now have a new demonstration of why they advocate fiscal austerity, except when the government support helps their cause – the Truss effect.

It is sad how gullible we all are.

There is one significant spending cut that I would propose for the US government though – they should immediately stop funding either in cash or goods and services anything that benefits the Israeli government.

And all Americans should immediately announce they cannot vote for the Democrats who are feeding the genocide.

That is enough for today!

(c) Copyright 2024 William Mitchell. All Rights Reserved.

This Post Has 9 Comments

  1. Thank you for the much needed daily dose of reality, Bill. Back in La La Land, we now have Gordon Brown proposing communities, charities, gift aid levies, and good old corporate philanthropy will rescue the ailing economy by expanding the ‘fiscal envelope’ .


    Absolutely agree with boycotting all trade with Israel, but I would go further and lobby the UN to impose a global ban on all arms export licences – stop funding and profiting from wars everywhere, not just in Palestine.

  2. “They could convert the dollars to another currency ”

    Exchange the dollars for another currency?

  3. “What other option have the Chinese got?”

    Another option is — they could spend those dollars in the U.S. market. To the detriment of those Americans who have trouble getting what they need at the prices now. That would put a big crimp in the imperial free ride.

  4. Bank of England’s rescue of the leveraged UK pension funds during the Truss affair showed that the power lies with the state.

    The markets *requested* rescue by the state! Suggestion that markets somehow threatened the state, rather than begging the state to save them, is an inverted narrative of what occurred.

    UK pension funds held interest rate swaps (pay floating, receive fixed) as hedges against falling interest rates. As collateral for the swaps, the funds had posted gilts. In an effect somewhat similar to that experienced by Silicon Valley Bank, rising rates caused the value of the gilts posted as collateral to decline, forcing the pension funds to sell other gilt to meet margin calls on the swaps.

    When the market (not the state) got into trouble, who did the market call for help?

    The same one who bailed out markets following the GFC.

    The same one who bailed out markets when the pandemic struck.

    The same one who bailed out Silicon Valley Bank.

    The one with the power.

    The State.

  5. I happen to have been studying the U.S. Congressional Budget Office document, “The Long-Term Budget Outlook: 2024 to 2054” (https://www.cbo.gov/publication/59711) linked to in the Financial Times article Bill cites. This article was published March 24 and is the apparent source of the latest round of Deficit Hawk squawking for which the FT article is a megaphone. It is interesting that the CBO document itself makes no direct comparison to the Truss affair in the U.K. Indeed, it hardly discusses the fiscal situations of other governments at all.

    This makes me wonder whether CBO Director Phillip L. Swagel’s remarks to the FT represent official CBO policy or whether the interviewer has lured him to comment outside his remit. I have emailed the CBO’s communications office for clarification.

  6. Great research.
    I also agree with…
    “There is one significant spending cut that I would propose for the US government though – they should immediately stop funding either in cash or goods and services anything that benefits the Israeli government.

    And all Americans should immediately announce they cannot vote for the Democrats who are feeding the genocide.”

    Thank you!

  7. For Carol Wilcox, Neil Wilson and the Brit cohort reading Bill’s blog. Have you considered approaching Gary Stevenson (Garys Economics YouTube 172K subscribers), wealtheconomics.org) with explanations of fiat money from an MMT understanding. If not, I strongly urge that you do so and try to show him how the currency issuer functions as distinct from currency users.

    Gary (born 1987) has clearly made himself a serious amount of money as a trader in London’s financial markets from the time of the GFC and was able to see the complete stupidity of those around him. Sadly, he only seems to know the non-government side and has accepted the government as a household that needs to tax the rich to get money for spending. He’s plainly a good guy out to change the system but remains ignorant of the operations of fiat money as viewed from the side of its issuer.

    I wrote to Gary back in mid-February with explanations and links to a range of presentations on matters MMT, while just a few days ago he demonstrated in discussion with Owen Jones on YouTube that he still carries the belief of government as a household as an underpinning for his arguments. Gary, being of a much younger generation than most of us, I suspect, who read Bill’s blog could be a vector into a demographic that must be cracked for MMT ideas to become ascendant. Bottom up and not top down is where change comes from.

    Ranting at and trying to influence politicians in power that are captured by the orthodoxy or those soon to be in power seems just like bashing your head against a brick wall.

  8. @Fred Schilling

    Regarding Gary (LOL) Stevenson (‘Garys Economics’ YouTube channel with 172K subscribers)

    Gary has made heaps of money from ethically dubious work, that is not enough however, now he wants to be famous as well, and to be seen as a ‘good guy’ lifting the lid on the shady world of trading in the financial markets — for if what he has revealed is some kind of revelation, his end game is to be able to hob nob with the billionaires (be invited on to the super-yacht parties with the hottest girls and the purest coke).

    He has written a book that is now becoming a movie.

    A media company produces his Youtube channel they buy views and subscribers to game the Youtube algorithm, he can afford that.

    He knows that if he was ever to mention MMT in a positive way it would mean instant expulsion from the social circles and media circles he wishes to continue to be involved with. The billionaires want the public to continue to believe the falsehood — that if it was not for the taxes that they give to the government the government would be broke. Thank god for those hard working billionaires creating jobs and funding the national government (LOL).

    If someone starts a business that produces a product or service that makes the world a better place, like sustainable energy for example. I am cheering for their success.

    Gary is a Neo-liberal rat-bag with many Karmic lessons waiting to be learnt.

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