Failure of the pound shows Truss will have to be as tough as Thatcher

British Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng visit Berkeley Modular in Kent on Friday. AP Photo

There are many reasons to hope that new UK Prime Minister Liz Truss makes a success of her time in office, not least that she is a rare example of the forgotten Generation X taking power.

The gamble Ms Truss is taking with the British economy – slashing taxes, increasing government borrowing and stimulating the housing market – are a hard tilt against an economic downturn and rising interest rates. “Trussonomics”, as it has been dubbed, puts Britain very vividly out on a limb against the G7 economic consensus at a time when the uplift in the US dollar is anyway crushing its big partner currencies, such as the yen, euro and renminbi.

The first few days of a Truss government marks a sharp departure from the path Conservative-led governments pursued in the UK since taking power in 2010 and an audacious attempt to bring about change.

The pound reacted terribly with a crash below $1.10 for the first time since 1985 last week. The experts have been damning. Larry Summers, the former US Treasury secretary, was not alone in alluding to banana republic status for the UK.

“It makes me very sorry to say, but I think the UK is behaving a bit like an emerging market turning itself into a submerging market,” he remarked. “Between Brexit, how far the Bank of England got behind the curve and now these fiscal policies, I think Britain will be remembered for having pursued the worst macroeconomic policies of any major country in a long time.”

Mr Summers cut his teeth fighting “voodoo economics” (or “Reaganomics”, or the Laffer Curve theory) that ran this same playbook in the US in the 1980s. As a resident of the UK, I have every reason at this stage to be braced for anything to happen. The pound was more or less pinned at $1.35 at the start of the year. Just six years and some months ago, it was touching the $1.50 mark.

For more than three full decades, the Thatcherite message has been lost in a different set of economic conditions

Here’s where the generational point is important to understand how convictional this is for the new UK leader – and, thus, why it matters at this point for the global economy.

Generation X has been largely excluded from power by the Baby Boomers, which include former leaders such as Barack Obama and Boris Johnson. Politicians like Ms Truss were absolutely formed by the 1980s – and in the UK, by the deep-running battles and trenchant nature of politics under former prime minister Margaret Thatcher. Having studied economics in the early 1990s, Ms Truss would have also had the formative foundation of how the monetarist experiment worked in the previous two decades.

For more than three full decades, the Thatcherite message has been lost in a different set of economic conditions. Now, the underlying economics have gone back to how it was when Ms Truss was growing up. That is why the new leader is moving so purposefully to establish her approach. In doing this, she is establishing her bond with British voters in the same month that she took office.

The coming winter in the UK is set to be marked by a monumental energy crisis. The package announced by Ms Truss and her finance minister, Kwasi Kwarteng, last week represents a bulwark to get through the backlash. As she said on taking office, Ms Truss survives if she can rescue the UK from the onsetting storm. The National Institute of Economic and Social Research on Friday forecast that her tax cuts and energy crisis decisions would lead to positive growth in gross domestic product in the fourth quarter of this year, shortening the recession and raising annual GDP growth to about 2 per cent over 2023 to 2024.

British Prime Minister Margaret Thatcher tries her hand with a television camera in London in 1987. AP Photo

Yet, the markets are in meltdown. This is because economists have stopped using the monetarist models and the idea that the cost of money rising to 8 per cent is outside the practical day-to-day experience of most working-age people in the West. There is no theory-based reason why that world could not re-emerge. Ms Truss has set course and, as Thatcher’s famous phrase had it, “the lady's not for turning”.

This means that something quite abnormal is going to unfold in the UK following the decisions of last week. You have to go back to the early 1990s for a contest so raw between a government and the financial markets.

One radical thought is that Ms Truss is not really bucking history but moving faster than others to address the conditions that are forcing the new economic malaise.

Recessionary forces are ripping. The money supply in the developed economies has already shrunk. Due to a lag in data, the price of money in the form of interest rates is going up, tightening yet further.

Using the tools of taxes to reverse these effects on growth is perfectly legitimate. What is more iffy about her policies is the reformist language she uses. Every right-leaning politician, and a good few on the left, have promised a bonfire of regulation for decades without making much difference.

Ms Truss has the chance to show that, what Generation X took from their childhood and academic experience, was a solid lesson that the Thatcherite approach can work. Most especially when all else has failed.