Politics: a choice of crises

By Richard North - September 27, 2022

Traditionally, it has been Labour governments that have experienced runs on the pound, with the 1976 sterling crisis written into the lore of British politics. But 16 September 1992 changed all that, with the notorious White Wednesday which wrecked the reputation of John Major’s Conservative government.

And while there were doubtless strong economic reasons for each of the crises that we have seen, then and since, such affairs are never entirely economic in origin. Confidence is often a relevant element, which makes them so difficult to manage, once it is lost.

Thus, I don’t need to reinvent myself as an economist to comment on the extraordinary events we’ve seen since Kwasi Modo’s not-a-budget. Essentially, the market seems to have lost confidence in The Replacement’s management of the economy. Dumping the pound is one of the consequences.

Needless to say, the economic hoodlums of the IEA and their fellow travellers are undisturbed by developments, although opinion is divided.

At the moment, the Bank of England is giving the impression that it is intent on riding out the storm. The government, on the other hand, seems to be permanently grounded on a completely different planet, oblivious to the effect of Modo’s work on market sentiment, of perhaps entirely indifferent to the storm he has caused.

In the nature of such things, though, the outcome is impossible to predict. That renders us no more than interested spectators and we must wait to see how this pans out. Maybe, just maybe, The Replacement’s gamble might pay off, and we will sit back in wonderment as the economy begins to prosper. There again, pigs might fly.

Yet, for the moment, a lot of “little” people are having to suffer an amount of financial stress, not least those who are struggling with mortgage payments and especially those who are seeking new mortgages.

Banks and building societies have removed dozens of mortgage deals from sale and homeowners have been racing to secure fixed rates because of fears that the cost of borrowing would soar. Aaron Strutt, a mortgage broker from Trinity Financial, says: “The chancellor’s announcement of tax cuts almost instantly pushed up the cost of borrowing and the subsequent product changes are causing carnage in the mortgage market”.

But there will be those in The Replacement’s administration who believe that mortgage chaos – as it has been described – is a small price to pay for the pure brilliance of Kwasi Modo’s great plan, and things will settle down in due course.

Kwasi himself has publicly played down any concerns about sterling movements in recent days and yesterday declined to comment on recent drops in the value of the pound. Conservative peer Lord Frost, we are told, has dismissed the fallout to the not-a-budget had been “unwarranted” and an “over-reaction”.

And yet, ministers are increasingly concerned that the Bank of England will be forced to implement aggressive rises in interest rates, hitting homeowners with huge rises in mortgage costs.

On the back benches Tory MPs who are already critical of the plans have put in letters of no confidence, although under the rules The Replacement is protected from a challenge for a year. They are concerned that the measures announced in Kwasi’s not-a-budget – particularly scrapping the 45p rate of income tax – will benefit the rich.

As mere interested spectators, however, we have the conundrum of deciding whether to get worked up over a putative financial meltdown, or something potentially life-changing such as a nuclear-powered Armageddon that the United States might trigger in response to the first use of a nuclear weapon by Putin’s forces.

On balance, between a financial and a nuclear meltdown, the latter might just prove to be of more immediate concern, especially as Russian foreign minister Sergey Lavrov has promised “full protection” up to the use of nuclear weapons for the regions of Ukraine that it plans to annex by the end of the month.

Asked whether Russia’s nuclear doctrine would apply to the four regions involved, Lavrov said that “all of Russia’s laws, doctrines and concepts” would apply. Russia’s nuclear doctrine allows their use if the country faces an “existential threat”.

The Kremlin, we are reminded, has made clear that any Ukrainian attempt to regain territory would be seen as a direct attack on Russia, abetted by the West. Lavrov said that it was “absolutely natural” that the territory would acquire the protections of the Russian Federation, which consists of 83 “federal subjects” plus annexed Crimea and Sevastopol.

Undeterred, Zelensky is pushing at the boundaries, declaring his intention to “liberate our entire country, from Kherson to the Luhansk region, from Crimea to the Donetsk region”. He adds: “Every murderer and torturer will be brought to justice for what he did against Ukrainians”.

Given that Ukrainian forces are taking more losses that has been admitted, there is every reason why Zelensky might be happy to see escalation force greater US or Nato intervention.

What makes this especially alarming, is that Jake Sullivan, the US national security adviser, has warned that Russia would face “catastrophic consequences” and that the US would “respond decisively” if nuclear weapons were used in Ukraine, which they could well be if Zelensky pushes harder than the Russians are prepared to tolerate.

Sullivan’s warning is sufficiently ambiguous to allow for a wide range of responses, from a conventional intervention – which could include the deployment of US air force assets in support of Ukrainian forces, direct support from US ground forces, or even a retaliatory nuclear strike.

Somehow, in the event of a Russian nuclear strike, the Western powers have the unenviable task of devising a proportionate response, sufficient to convey displeasure without showing weakness, without provoking further escalation which could result in trading multiple ICBMs over the North Pole.

If this following this drama is not sufficiently engaging, there is always the energy crisis to fall back on, even if the falling price of gas might suggest to some that the worst of the crisis is over.

However, while prices might at the moment be tumbling, we have to recognise that what can go down can also, very rapidly, go back up, especially if the Russians do something creative – such as nuking Ukrainian gas infrastructure, or other thoughtful measures designed to interrupt gas flows to the West.

Uncertainty is in itself a driver of price instability and the winter weather taking hold could be taken by the Russians as cue for further action. We are very far from being out of the woods just yet.

At least we have the consolation, though, of reading a confession from Lord Howell, secretary of state for energy between May 1979 and September 1981 on the failures of Thatcher’s energy plan, derailed by short-termism in the push for nuclear power.

In a long piece, he tells us that the key to a reliable, affordable, clean national energy system secure in all eventualities is – and has been all along – balanced diversity and deep resilience along with adequate reserves and storage. Generating 45 percent of electricity from gas, he says, is not diversity. Closing down adequate storage, whether of gas or hydrogen or any other energy vector, is not diversity, or common sense.

He adds that over-reliance on wind power without adequate back-up when the wind drops is not diversity. Letting low-carbon nuclear run down to few gigawatts is not diversity, nor is putting faith in over-sized, outdated nuclear designs.

Finally, he says, disorderly energy transition, closing down fossil fuels production faster than demand is falling, is neither diversity nor wise management and balance. Nor is fooling ourselves that our own net zero target will halt the rise of global emissions and protect us uniquely from climate violence.

Now that we are paying the “gigantic price”, at least we are better informed about the failures of the past, although this will prove to be no protection from current policy failures, which are many and diverse. If there is a consistent strain to generations of energy policy, it is the determination of successive politicians to fail.

In one small sense, however, we are fortunate in having plenty to worry about. We can choose between a crashing economy, nuclear obliteration or freezing through the winter as the energy runs out. Take your pick.