Morning Brief – Is a weak PM what the country needs?

Is a weak PM what the country needs?

I’ll agree with you, the title of this daily briefing sounded more daily mail in style than I’m typically comfortable with. But the more I consider the question the more it makes sense. Boris was condemned by scandal, not policy. It was party gate not the substance of his government that proved to be his Achilles heel. Or as he may prefer to put it, his Cincinnatus heel. The next administration that was ushered in from a Conservative Party vote was that of Liz Truss. Her premiership was cut short as a result of her politics being too radical with special mentions deserved for the role of the Treasury and her Chancellor Kwasi Kwarteng in facilitating her downfall. If the politics of Truss were too radical and too interventionist for market and public attitudes in this post-pandemic inflationary era, perhaps closer to a do-nothing Prime Minister is what the UK wants – even needs?

Economists always disagree on the role of a government before a recession and during a period of high inflation. You don’t have to agree with mine but here it is anyway: in an inflationary environment the government’s role is to do nothing. Much like the captain of a certainly sinking ship, there isn’t a great deal you can do. Sure, you could handout a few life jackets and consider whether you’ll be following the old adage that a captain goes down with his ship. But fundamentally, the alarm is ringing, the passengers are lined up on the decks in life rafts, and Jack and Rose already know their ill-fated romance is about to take a frosty turn. The point is your role as the head of the ship is insignificant. Your normal duties of steering and powering the ship, plotting a course and coordinating a crew are all but redundant. 

I got a bit carried away with titanic there, but a government’s role is more often than not to do nothing in a time like we observe now from an economic perspective for several reasons. Firstly, 99% of effective government action is inflationary. There is some marginal economic adjustment to be made from withdrawing spending but let’s be honest, no government other than Cameron’s 2010 government wants to be seen to cut spending and austerity doesn’t work and isn’t attractive. This policy is therefore as unlikely as it is ineffective. Surely, if anything you can and are willing to do will make the main problem of inflation worse then you should do nothing. Secondly, fiscal policy has a huge lead time to economic impact. If you take action now inflation will be over and your policies may just be taking effect in a time when a completely different policy set is required. To name a third, the only credible high-level government policy that can tame inflation is supply side developments. This explains Rishi Sunak’s pie in the sky aim to make the UK a high skilled innovative force. Far from tackling inflation, you’ll be lucky to see any change from even the most radical of policy adjustments within the next 15 years.  

This brief was motivated by my annoyance at Rishi Sunak’s claim to halve inflation within the next year. This is a claim that no government could or perhaps should be making. Inflation is a financial and monetary consequence of economic activity and it would be the apolitical central bank that would hold the tools necessary to do something about it, not the government. However, this half tongue in cheek, half attack masquerading as a defence of the new Prime Minister could lead us to a more significant conclusion for FX. The conclusion to draw for major currencies at least over the next couple of quarters is that politics is unlikely to be the venue that creates major shifts in currency crosses. Instead, focus should continue to be on central banks and data.

Discussion and Analysis by Charles Porter

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