Is it just me, or does Liz Truss not really feel like prime minister? Like, I’ve experienced seven prime ministers in my lifetime – all of which I haven’t voted for – but this is the first I’ve truly felt ungoverned. Unhinged, you might say!
Chancellor Kwasi Kwarteng – some guy most of us had never heard of until a couple of months ago when he tried and failed to become prime minister – is now in charge of the entire UK money pot to do with as he pleases, and unfortunately his interests are not aligned with those of the majority of the UK population. His mini-budget on Friday sunk the sterling to a historic low against the dollar. It is currently now slumping as much as 1 percent to around $1.06.
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But what does that mean for you, besides making that “pound stolen” sketch from The Day Today suddenly painfully relevant? VICE spoke to some experts to find out how it affects us all and how bad it can actually get.
What does the pound crashing mean?
Put simply, “the pound has fallen in value against other currencies”, explains David Spencer, a professor of economics at the University of Leeds.
The money in our banks and wallets has now less value when compared to the US dollar, essentially because “people think the UK economy is less of a good long-term bet”, says Kevin Albertson, an economics professor at Manchester Metropolitan University. Well, I wouldn’t bet on us either right now, to be honest.
Who exactly is ‘betting’ on the UK economy, then?
“Really, anybody that would contemplate investing in the UK,” says Albertson. “That will include even people living here, because of course, they can invest their money overseas. Ultimately, I guess you could say it is a sign that people think the international economic position of the UK is deteriorating.” Cheering!
How will the pound falling affect me, though?
“There’s quite a few ways in which it’s going to affect the average person,” says UCL professor Morten Ravn. “The first one is, of course, when the pound drops, then UK import of goods become more expensive. Important things that we buy and consume will be more expensive, because the pound is worth less.”
“The next one is that because the yields on UK government debt are going up so much, it’s more expensive for the government to finance its deficit,” he adds. “That will eventually mean that somebody has to pay that bill – and that will be the average UK household.”
What’s a yield? Well, it’s how much money people can make off buying our government’s debt. The less trustworthy the country, the riskier the investment, and therefore, the higher the yield and the longer it takes the government to repay those investors.
The good news doesn’t end there, says Ravn. To control inflation, the Bank of England “will have to be more aggressive and increase the interest rate, and that will increase the cost of mortgages for those UK households that either have a mortgage or are thinking of buying a property, and subsequently, renters.” (More on this last point in a second.)
Basically, in the short and long term, most people will be paying off the unforeseen cost of this mini-budget. Thanks, Liz!
Why is the pound falling now??
“The mini-budget prompted holders of pounds to sell, depreciating the currency,” says Spencer. Like Ravn, he believes that the Bank of England will come through on its warning to push up interest rates. “The worry is that monetary and fiscal policy are now pushing in opposite directions. The prospects for any sustained recovery look unlikely.” That’s also why UK looks like an increasingly bad place to invest right now.
Okay, but what do you mean by monetary and fiscal policy?
“Monetary policy would be in the hands of the Bank of England and private banks,” explains Albertson. “It depends on the amount of money in circulation and the interest rate, which is the cost the Bank of England sets as the government’s official interest rates.
“It’s an indication of how much we’re paying on our mortgages,” he adds. “We pay much more than that, of course, but if the Bank of England base rate goes up, our mortgage rates will too,” he adds. In turn, your scumbag landlord will almost inevitably pass the buck on to you.
Fiscal policy, on the other hand, might “be an increase in taxes, for example, or investment in infrastructure” – AKA something the government has more control over, like this horrible mini-budget.
Basically, the issue has arisen because the government is spending lots of money when it’s already in a massive amount of debt. Which you’ll know from the last time you booked a holiday when you were already in your overdraft, is not a great idea!
What’s the worst case scenario for the pound sterling?
Well, for the same reason that people “bet” on the UK economy, most economists don’t like to tempt fate by predicting the worst case scenario, but Vania Stavrakeva, an assistant economics professor of at the London Business School was brave enough to take a punt on it.
“My worst hypothesis is this crazy theory called MMT [Modern Monetary Theory],” she says. “Not a single mainstream economist agrees with it. It’s horrible. It’s a disaster. But what it says is that the government can spend like crazy, and the central bank should just print money to finance it.”
MMT initially gained traction among left-leaning economists and politicians, including Alexandra Ocasio-Cortez, as a way for a government to raise funds without raising taxes. Truss and Kwarteng’s mini-budget might be a Tory-lite version, but bankers are now pointing to the tanking pound as evidence that the theory doesn’t work: “What’s going on in the UK probably proves that this Modern Monetary Theory is hogwash,” Mark Haefele, chief investment officer at UBS Global Wealth Management, told Bloomberg.
Stavrakeva agrees: “Countries have tried it – usually developing countries, emerging markets and historically advanced economies, for example, Germany during the two World Wars. You end up with hyperinflation, with 100 percent inflation or more.”
But fortunately, every economist I spoke to, including Stavrakeva, added that hyperinflation was extremely unlikely to happen in the UK. “I would put zero probability on that,” Ravn assured me regarding any situation involving hyperinflation.
What can I do now the pound is crashing?
As with every Conservative government in history, the pressure of a failing economy always falls on the consumer, with those in poverty affected the worst. “We should all review our finances, and particularly the discretionary items, because the cost of the essentials is increasing,” Albertson says. “If you’re relatively young-ish, maybe have your thermostat set at 18 degrees.”
Great – if it wasn’t already bad enough that boomers were telling us to cancel our Netflix subscriptions to afford a home, now economists are telling us to stop putting our heating on. Meanwhile, someone earning a million-pound salary will now be better off by £55,200 a year, thanks to tax breaks outline in the mini-budget. If that’s not a reason to get out there and vote at the next general election, you’ll never be convinced.
