A 45-day period will forever be known as a “Truss” for Liz Truss’s tenure before resigning as British prime minister, much as 11 days is a “Mooch” for Anthony Scaramucci’s short stint in the Trump administration. Come to think of it, a “Biden” is 208 days, the time from Inauguration Day until the fall of Kabul after the Afghanistan scram in August 2021. President Biden has been a bit of a lame duck ever since, and if polls are right, even more so after Tuesday’s elections.
I feel bad for Ms. Truss, but only because whoever was in that seat, like the passenger in James Bond’s Aston Martin DB5, was going to be ejected. Unknown to many, U.K. pension funds had been hedging against interest rate increases, using derivatives with six or seven times leverage. As inflation hit 10.1%, interest rates were going up no matter what, which caused funds to dump gilts, or bonds, to pay their margin calls, crushing the currency.
The press jumped on Ms. Truss’s tax cuts (lowered from 45% to 40% for £150,000 earners) but ignored her subsidies for high energy bills. It wasn’t tax cuts that did her in; it was deadly pension leverage. Both Reagan and Thatcher knew to slay the inflation dragon first. To stabilize the situation, the Bank of England printed tons of pounds to buy bonds—more quantitative easing in an inflationary world. Not smart.
The new prime minister Rishi Sunak, a Stanford M.B.A., is foolishly exploring tax increases. Sadly, tax cuts are probably dead in the U.K., maybe for a decade. Well, stick a fork in jolly old England. Mr. Sunak should listen to his predecessor Winston Churchill, who said: “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
The U.S. should heed that advice as well. Mr. Biden says “in our bones, we know democracy is at risk” but nevertheless he turbocharges spending—bucket handle lifting. The Biden administration is pro-union, a tax on consumers. It killed pipelines and energy exploration, raising energy costs. It has forgiven student loans, which means tuition is going up. Its Inflation Reduction Act is filled with green pork and healthcare tax credits. It set minimum corporate taxes of 15% for big corporations that will be passed along to consumers. And a 1% excise tax on stock buybacks. And 87,000 new IRS agents to shake down the American middle class. Democracy is fine; I’d say the economy is at risk.
Interest rates of 5% or higher should slay the inflation dragon, but then what?
