Having sealed her chancellor’s fate, the markets could seal the prime minister’s fate
So farewell, then, Trussonomics.
The demise of the country’s second shortest-lived chancellor also brings with it the demise of the country’s shortest-lived economic movement.
Liz Truss came into office promising to boost the country’s growth rate through a forensic combination of tax cuts, reforms to the country’s supply side (for which read: things like planning reform) and spending restraint. This was, if you squint a little bit, not dissimilar to the kinds of policies espoused by Ronald Reagan and Margaret Thatcher.
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It always looked risky – especially at such a fragile point for the global economy. We are coming to the end of a 12-year period of cheap money, something which is causing a near-nervous breakdown in financial markets. Central banks are in the process of raising interest rates and trying to feed the glut of bonds they bought during the financial crisis back in the market.
As if that weren’t enough, Europe is facing one of its bleakest economic winters in modern memory, with a war raging in Ukraine and energy prices touching historic highs. It is hard to think of many less auspicious periods to attempt an untested new economic manifesto.
Yet Ms Truss and her former chancellor Kwasi Kwarteng pushed on all the same. And unlike Thatcher, whose first few budgets were grisly austerity packages which no one much enjoyed, Ms Truss and Mr Kwarteng aimed to turn Thatcherism on its head. Instead of fixing the public finances first and then cutting taxes second, they opted to spend the fruits of economic growth before that growth had even been achieved.
The mini-budget of 23 September was a small document with extraordinarily large consequences. Ironically, the more expensive the measures were, the less controversial they turned out to be. The scheme to cap household energy unit costs will potentially cost hundreds of billions of pounds, yet (and we know this because it was pre-announced long before the mini-budget) investors barely batted an eyelid. They carried on lending to this country at more or less the same or equivalent rates.
The same was not the case for the rest of the mini-budget’s policies. Shortly after they were announced – everything from the abolition of the 45p rate (actually quite cheap in fiscal terms) to the cancellation of Rishi Sunak’s corporation tax rise – markets began to lurch in what was, for Ms Truss, and most UK households, the wrong direction. The pound sank, the yields on government debt, which determine the interest rates across most of the economy, began to climb.
That was bad enough. When Mr Kwarteng announced gleefully a couple of days later on television that he had more tax cuts up his sleeve, the trot out of the country became a stampede. The pound fell, briefly, to the lowest level against the dollar in the history of, well, the dollar.
Even more worryingly, those interest rates on government bonds rose at an unprecedented rate, causing all sorts of malfunctions throughout the money markets.
The most obvious – and the one that perhaps will have the longest legacy – is the rise in mortgage rates. But the unexpected consequences were even more worrying, among them a crisis in funds used by pension schemes. That sparked a “run dynamic” which compelled the Bank of England to step in with an emergency support scheme.
Even at this point, we were into unprecedented territory. Never before had the Bank been forced to intervene quite like this. Never before had it had to do so as a result of a government’s Budget.
The intervention, however, had some success, bringing down the relevant interest rates and bringing markets back from the edge. But there was a sting in the tail: a deadline. Today, 14 October.
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Analysis: PM’s new tax U-turn
In hindsight perhaps it’s obvious that this, then, would always have been the day when the government might face another existential crisis. Investors were always going to be nervous ahead of the Bank’s withdrawal from this neck of the bond market. And that is precisely what happened: after the governor reiterated, on a panel in Washington, that he was indeed serious, all eyes then turned to the chancellor. Could he say something to reassure markets?
In the event, the answer was: no. But something else changed matters: growing rumours of a U-turn. That brings us to this morning. The chancellor, pulled back from Washington early, was dismissed. The U-turn began. The corporation tax freeze is to be abandoned. The coming medium-term fiscal plan will involve austerity and a big dose of fiscal pain. The upshot is that Trussonomics, which was hinged clearly on tax cuts like these, is dead in the water.
However, the bigger question concerns what happens next. Those markets, which Ms Truss said explicitly were the reason for her U-turn, are still pretty frantic. No one knows how they’ll fare on Monday, but, whether right or wrong, another grisly day will almost certainly be seen as a sign of the government’s failure. And, having sealed the fate of her chancellor, the markets could well seal the fate of the prime minister.
But that’s a few days away – a long time in both politics and markets.
Liz Truss appoints Jeremy Hunt as chancellor. Pic: Andrew Parsons / No 10 Downing Street
In the meantime, here is something to dwell on: an alternative version of history. In a parallel universe, Ms Truss and Mr Kwarteng did things slightly less hastily. They decided their emergency Budget would simply deal with the energy price shock coming this winter. They promised an OBR statement and hatched plans for a growth-generating budget in a few months’ time.
In that parallel universe, interest rates probably wouldn’t have risen so high. The rises would, anyway, have been blamed on the Bank of England, not the government. The government would have enjoyed some kudos for having prevented energy-related penury this winter and made merry in their honeymoon. Things could have been oh-so different.
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Now, all of this is of course imponderable. But it does rather underline an important point: none of this was inevitable. This wasn’t a crisis like 1992 – where the UK faced monetary pressures suffered by nearly every other nation in Europe. It was simply a succession of very unfortunate decisions at precisely the wrong moment.
At a time of market turmoil and war in Europe, Ms Truss and Mr Kwarteng chose to take a gamble. It did not pay off.
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Hamas agrees to release all remaining Israeli hostages – but seeks further talks on rest of Trump’s peace deal
Hamas has said it agrees to release Israeli hostages, dead and alive, under Donald Trump’s peace plan for Gaza.
The group also said it wants to engage in negotiations to discuss further details, including handing over “administration of the enclave to a Palestinian body of independent autocrats”.
However, other aspects of the 20-point plan, it said, would require further consultation among Palestinians.
The announcement came just hours after President Trump had set a new deadline of Sunday to respond to his proposals, backed by the Arab nations.
The president and Israeli Prime Minister Benjamin Netanyahu unveiled the plan at the White House on Monday.
Israel agreed to the terms, which include an immediate ceasefire; the release of all hostages; Hamas disarming; a guarantee no one will be forced to leave Gaza; and a governing “peace panel” including Sir Tony Blair.
And on Friday night, a statement from Hamas confirmed “its approval to release all prisoners of the occupation – whether alive or the remains of the deceased – according to the exchange framework included in President Trump’s proposal”.
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Trump’s Sunday deadline threat
The group also said it was ready to engage in negotiations through mediators and that it appreciated “Arab, Islamc and international efforts, as well as the efforts of US President Donald Trump”.
But, Hamas official Mousa Abu Marzouk told Al Jazeera news the group would not disarm “before the Israeli occupation ends”.
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In a Truth Social post on Friday, Mr Trump said if Hamas did not agree to the peace deal by Sunday evening “all hell” would break out.
Ramping up pressure
He had posted: “An Agreement must be reached with Hamas by Sunday Evening at SIX (6) P.M., Washington, D.C. time. Every Country has signed on! If this LAST CHANCE agreement is not reached, all HELL, like no one has ever seen before, will break out against Hamas. THERE WILL BE PEACE IN THE MIDDLE EAST ONE WAY OR THE OTHER.”
There has been no official response from the US and Israel to the partial acceptance.
Israel has sought to ramp up pressure on Hamas since ending an earlier ceasefire in March.
It sealed the territory off from food, medicine and other goods for two and a half months and has seized, flattened and largely depopulated large areas of the territory.
Experts determined Gaza City had slid into famine shortly before Israel launched a major offensive aimed at occupying it.
An estimated 400,000 people have fled the city in recent weeks, but hundreds of thousands more have stayed behind.
Most of Hamas’ top leaders in Gaza and thousands of its fighters have already been killed, but it still has influence in areas not controlled by the Israeli military and launches sporadic attacks that have killed and wounded Israeli soldiers.
World
Colombia is high on Trump’s troublemaker list – but coca farmers will keep producing to match US demand
“Listen man, we’re a narco state, it’s just how it is, if you want to see drug deals, I’ll show you drug deals – it’s Colombia.”
I’d only asked one of our Colombian producers in passing if it was possible to see drugs being traded on the streets of Medellin. I didn’t realise it was that simple.
Medellin is synonymous with drugs and cartels. The home of perhaps the most famous of all the drug lords, Pablo Escobar, it seems to revel in its notoriety.
There are pictures of Escobar everywhere, on posters, on caps, and on t-shirts. There are even guided tours to his grave, and a museum in his honour.
Stuart Ramsay speaks with a coca farmer, who earn very little from growing the crop
This is where the big business drug cartels were born, invented by Escobar himself, the original Latin American “Godfather”.
In an infamous district in Medellin, we were instantly confronted with the sounds of dealers on the streets shouting out their products for sale as we drove through.
“Cocaine! Pills! Ecstasy! Tusi!” they shouted. All available to a traffic jam of cars waiting to buy.
Motorcycle delivery drivers queued to make the pick-up for their clients waiting in high-end apartments and nightclubs elsewhere in the city, while buyers on foot discreetly scored their drugs, before moving on.
Medellin was the home of Pablo Escobar and drugs are widely traded on its streets
‘Narco’ culture
It was chaotic and noisy, a place where lookouts use whistles to send signals to the dealers.
Two toots mean it’s all clear, a single toot is a warning – it means the police are nearby.
In the middle of this big open-air market for drugs, dimly lit restaurants and cafes served dinner. We passed one café where we saw a family sat at a table outside, celebrating a woman’s 70th birthday.
This neighbourhood runs a 24-hour drug selling market alongside the usual shops and cafes that spill over on to the pavement.
It is not illegal to grow coca, only to use it to produce cocaine
Although Colombia has a long history and fascination with “narco” culture and drug-taking, its immediate problem is that President Donald Trump has launched a war on Latin American drug cartels, manufacturers, and the nations the drugs come from – and through.
Venezuela is at the top of his hit list; he has launched strikes on boats off the Venezuelan coast that he says were carrying drugs. He has boosted American military presence in the Caribbean – sending ships, marines, helicopters, drones and jets into the region.
There is speculation he may be looking for regime change in Venezuela, and that the war on drugs is a front to remove President Nicolas Maduro from power, claiming the Venezuelan government is basically a drug cartel. Something they of course deny.
This coca plantation was hacked into the rainforest on the border of Colombia and Peru
None of this bodes well for Venezuela’s neighbour Colombia, indeed President Trump has made it clear Colombia is high on his list of troublesome nations.
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There are other countries on his list, like Mexico, that he says has demonstrated willingness to clean up their act and take the war to Mexico’s deadly cartels.
Mr Trump’s gripe with Colombia isn’t necessarily that its society has a relaxed attitude to drug use – it is widespread across all classes – no, his problem is that Colombia is one of the biggest producers of cocaine in the world, and it feeds the biggest market, which is the United States of America.
Coca plantations are hidden miles away from other people in the Amazon
Hidden away, miles from people
It seems that the president’s view is that the supplier is the problem, not necessarily the user.
Cocaine is extracted from the coca leaf, which is grown in abundance in Colombia, Peru, and Bolivia.
Growing the coca plant in these countries is not illegal, and the leaf itself is often used for other purposes. The plant only becomes illegal when it’s used for cocaine production.
I wanted to meet the farmers who grow coca to find out if they are the masterminds of a multi-billion-pound international drugs business, or just farmers meeting international demand.
My journey began just after dawn in pouring rain on the Amazon River in Colombia.
Perhaps unsurprisingly the plantations are hidden away in remote areas, miles away from people.
Stuart Ramsay in the rainforest
We travelled for hours in the rain, on a small boat with a guide, passing indigenous communities who have nothing to do with the business hiding in their forest.
The river narrowed as we got closer to our destination, and five hours later, after navigating through broken tree trunks and low hanging branches, we arrived at an eight hectare coca plantation hacked into the rainforest bordering Colombia and Peru.
The crop, which is two-and-a-half years old, is hidden by the trees and the river.
They are about to start harvesting it, but it’s incredible just how many leaves they need.
The farmer says that for every 70 grams of cocaine produced, the cartel producers need 30 kilograms of leaves.
Colombia is one of the biggest producers of cocaine
Only way to provide for his family
That’s a lot of picking – and the farmer will earn just $7 for those 30 kilograms of leaves.
The cocaine business might be incredibly lucrative for the cartels that control it, but at the very bottom the farmers hardly get paid a thing.
And though he is worried about getting caught, the farmer I meet sees it as the only way to provide for his family.
“For me it’s very valuable, it’s my sustenance, the way for sustaining life,” he told me.
“We are aware that illegal processing isn’t good for anybody, not exactly, you can’t say I am doing this, and this is good for people, no, this harms the entire community, everyone,” he explained when I asked him if he was at all conflicted about his crop.
“But we all make sacrifices, and we struggle to make our way in life.”
It’s hard to believe that the global business of manufacturing and shipping cocaine around the world all starts with these fairly innocuous looking coca leaves.
And whatever Donald Trump says, they will keep producing as long as users in America, Europe, and indeed the world, demand it.
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