So far, Liz Truss’ time as Prime Minister reminds me of my late grandfather’s rugby career. A lifelong rugby fanatic, he played and then volunteered at his local club for decades. When the clubhouse was rebuilt, he requested William Ernest Henley’s poem “Invictus” be painted on the wall, which rousingly concludes “I am the master of my fate, I am the captain of my soul.” This was the way my grandfather lived his life, believing that with tenacious, stubborn stoicism one could achieve anything. Ironically, however, being a small man, he never made the first XV, despite his best efforts.
As Truss has been forced to realise early in her premiership, the laws of physics also apply in politics, with orthodox economics and public opinion bringing her boosterism back down to earth. But while Britain preoccupies itself with an implosion of its own creation, we should remember we’re a small fish in a big pond. Jerome Powell, Chair of the Federal Reserve, is on a mission to curb US inflation, come what may. The effects will reverberate around the world and could kibosh Truss’ economic ambitions.
Under Powell’s leadership, the Fed has raised its base rate more than any other major central bank, rapidly hiking rates by three percentage points in six months, and signalling another rise of 1.25 percentage points before the year is out. This has sent the dollar on a meteoric rise, appreciating by an average of 12 percent in the last nine months.
When America sneezes, the world catches a cold, and developed markets are not immune. As the world’s reserve currency, with 40% of the world’s transactions done in dollars, and most commodities, such as metals and timber, traded almost exclusively in the currency, an appreciating dollar means other markets import more inflation. Likewise, further rate rises stand to impede US growth, with some commentators saying a recession is “just a question of when.” As China’s zero-Covid policy continues to slow down markets, global growth forecasts are being slashed.
This is the global macroeconomic environment Truss inherited. To actualise her growth agenda, Britain will have to dramatically outperform other markets as they slow down or slip into recession — a rare feat. More certainly, Truss’ expansionist fiscal gamble will be fuelled at least partly by borrowing, which will become more expensive as our own rates rise to counteract the inflation we import from the dollar. Not only will this exacerbate Truss’ debt headaches, inflation will also rise as we spend more on debt interest payments. This phenomenon will likely cause the dollar to appreciate further against the pound, making UK businesses attractively cheap assets for American investors. It’s doubtful selling off what’s left of British industry will benefit our long-term growth prospects.
Truss is unlikely to gain agency any time soon. Powell’s commitment to repeatedly hike rates owes more to his ideology than evidence: even when indicators point in the other direction, he doubles down. The Chair of the Fed sees himself as a modern-day Paul Volcker, his 1980s predecessor who won plaudits for his tight grip of monetary policy, calling him “the greatest economic public servant of the era.” But operating in a different century, Powell looks like a general fighting the last war, talking of raising rates further as inflation tapers off before his own rates transmit into the market, and directly contradicting Joe Biden’s stimulus package. Powell is likely embarrassed for claiming inflation would be “transitory” before the Russian invasion of Ukraine and is now on a mission to save face, even as the UN urges caution.
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In recent months, there’s been a backlash about the pervasiveness of American ideas in British politics. Writing on a theme first observed by The Economist, The Financial Times’ Janan Ganesh wrote: “Reaganism is a good idea, but Reaganism without the dollar isn’t.” As Britain searches for its own voice, it mustn’t forget its destiny is tied — at least in part — to the big boys across the pond. Trussonomics may fail not simply because Britain mistakes itself for America, but directly due to America’s actions.
Even now, in our multipolar world, Truss would do well to observe the words widely attributed to Karl Rove, former White House Deputy Chief of Staff to George W. Bush, on American influence: “When we act, we create our own reality… We’re history’s actors . . . and you, all of you, will be left to just study what we do.”