The Breakdown - A Head of Lettuce Outlasted British PM Liz Truss

Starting point is 00:00:00 At a time when every economy in the world has been subject to massive exogenous forces that have shattered not only short-term expectations, but also unleashed or accelerated seismic changes in how we work and live, and how we consider our strategic alliances and alignments, everyone is forced to race to catch up. And this right now is what politics everywhere is about. Liz Trust tried to do some stuff that normal conservatives would, a big tax cut, and got absolutely hacked because of it, because it ran afoul of the time that she was in, and forces greater than Britain. Welcome back to The Breakdown with me, NLW.

Starting point is 00:00:35 It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Circle, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, October 20th, and today we are talking about how a head of lettuce outlasted British Prime Minister Liz Truss. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord.

Starting point is 00:01:09 You can find a link in the show notes or go to bit.ly slash breakdown pod. Also a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. All right, guys, well, we had so much to talk about today. there are interesting machinations in Washington as relates to crypto policy. We've got more and more legal challenges from the crypto sector coming to government agencies like the SEC. We've got the SEC embroiled in some questions around its staffing. But there was a historic event this morning that I thought was worth digging into a little bit, not because it exactly hits what we normally

Starting point is 00:01:47 talk about on the surface of it. In fact, on the surface of it, it's quite far outside of what our normal conversations are. But I think it has something to tell us about the state of the world. And so, here we are. In The Economist magazine on October 11th, a clever writer noted that between the almost immediate political implosion around Trust and the 10 days of morning after Queen Elizabeth II died, new British Prime Minister Liz Trust's political authority had, quote, roughly the shelf life of a lettuce. A few days later, on October 14th, British tabloid the Daily Star, started a live video feed on YouTube, focused on a head of lettuce that had been purchased at a Tesco. A portrait of Liz Truss sat next to the lettuce, and the screen read,

Starting point is 00:02:30 Will Liz Truss outlast this lettuce? As of this morning, the lettuce has won. The moment of the announcement of Truss's resignation on the live stream had much fanfare. The photo of Truss that had been next to the lettuce was flipped face down, colorful lights swirled all around, and God Save the King played on repeat. More than 20. thousand people tuned in live. So yes, Liz Trust has resigned as prime minister of the UK after just 45 days, marking the shortest tenure in history for that position. And again, if you're wondering why an American show about Bitcoin and Crypto and Power Shifts is covering British politics, well, I think there are broadly speaking two ways to look at this news. The first is through the lens of

Starting point is 00:03:10 a domestic political story in Britain, an unpopular politician proposing some even less popular policies after coming to power in an already politically complicated way without any sort of mandate being ousted by her party to say face. All of that is certainly true in a legitimate way to look at this. But I think there's another context or perspective as well, and that is to view trust as a political casualty of global macro and geopolitical forces. In that view, we might see Liz and her government's proposed policies as smashing into a wall of reality, created not by domestic politics in Britain, but instead, by global economic and geopolitical forces in which Britain, and by extension, the trust government was just one subject. That's obviously the lens that we'll be exploring today.

Starting point is 00:03:55 Now, what's more bringing a markets dimension into this conversation, it's clear that what has been happening in the UK has been internalized by markets much more widely. Trader Alex Kruger made this point on Tuesday, October 18th, when he tweeted a chart with a comment, quote, the UK has been firmly in the market's driver's seat since late September. The chart he shares showed the incredible correlation over the last month of four charts. The UK 10-year bond or guilt, the price of Bitcoin, S&P 500 futures, and the British pound in dollar terms. The charts march in lock step, starting at the end of September on the 23rd.

Starting point is 00:04:30 That, of course, is when Britain's tax cut and borrowing plan cratered all of these markets at once. That bleeding was stemmed a few days later on the 28th when the Bank of England announced the $75 billion bond buying program. That recovery lasted about a week before confidence in the bond buying program lagged and all of the markets started to turn down once again. Now keep in mind, these disparate charts are all moving roughly together. On October 12th, another bottom was hit around speculation that the trust government might ditch their plans for the budget entirely. A Tory MP text was released which said, quote, I think we're headed for the most humiliating

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Starting point is 00:07:15 So let's do the TLDR on what actually has. happened. In July, Boris Johnson announced that he would be stepping down as Conservative Party leader and prime minister of the UK. This happened after a vicious two-day period where multiple members of his UK government resigned, putting pressure on Boris to go. The tipping point had been a scandal in which Johnson had appointed a whip who, the accusations go, Johnson knew had been accused of sexually inappropriate behavior even before he appointed him. Importantly, this was the last in a string of scandals that had been plaguing Johnson throughout his time in office. And ultimately, it was the rest of the government abandoning him that really forced the issue.

Starting point is 00:07:51 Now, because the Conservative Party had won the 2019 election with an 80-seat majority in the 650-seat UK Parliament, which, by the way, was their biggest majority in about 32 years, they had the power to figure out who would be the next PM. By the beginning of September, the contest had come down to two candidates, who would be determined in a vote by Tory party members. The two candidates were UK Foreign Secretary Liz Truss, versus former chancellor of the exchequer Rishi Sunak. Crypto at this point was paying at least a little attention to Rishi because he had been at the

Starting point is 00:08:20 helm of the big PR turnaround in the British government's language around crypto. Whereas over the past few years, the UK, particularly the UK's financial conduct authority, had been fairly antagonistic towards this industry. Rishi promised a new push to make the UK a crypto hub. This meant things like recognition of stable coins as an official means of payment, the treasury minting NFTs and more. Alas, at the beginning of September, Rishi lost the vote to Liz. When she accepted the post, Trust repeated over and over that she and her government would deliver. For example, I will deliver on the energy crisis, dealing with people's energy bills, but also dealing with the long-term issues we have on energy supply.

Starting point is 00:08:59 And this was a nod to the fact that Trust inherited a UK with serious issues. Over the summer, the UK had become the first major economy to hit double-digit inflation in the post-COVID era. And what's more, the 10% number they hit was frankly held in check by price controls on energy. which had been due to expire in October. The Bank of England estimated that inflation would hit 13 to 14% after those restrictions were eased, and major investment houses were guessing even higher. Britain has been particularly impacted by restrictions to the flow of liquefied natural gas stemming from sanctions following Russia's invasion of Ukraine. While the UK imports less than 4% of its gas from Russia, there is a cumulative effect. Germany, for example, previously got

Starting point is 00:09:41 55% from Russia, and as part of their adaptation, had to turn to Norway, which was British. Britain's primary source in the past, hence creating new competition and price increases. On top of that, though, the UK is just more dependent on gas because it has fewer alternatives. 85% of British households use gas for heating, which is the most in Europe outside of Italy. The result is that there has been a massive rise in fuel poverty, where families dip under the poverty line after they pay their energy bills. Fuel-poor households have more than doubled from 3.2 million in 2020 to 6.7 million in 2022. On average, people are paying 2,100 to 2,800 pounds more per year on energy, and that's expected to rise to more than 4,000 pounds per year. So right here, we've obviously hit the idea that

Starting point is 00:10:25 what trust confronted wasn't just a UK problem, but a global geopolitical and economic problem that had a specific manifestation in her country. So trust comes to power and what would be her big policy announcement. Many anticipated it would be roughly in line with what she had been campaigning on, a cancel in the rise on national insurance and corporation tax, and a continued energy price freeze. The Guardian Today wrote those pledges would have been plenty for the new government to announce in the supposedly stripped back tax and spending event. Instead, what came on Friday, September 23rd from Truss and her finance minister, Quasi Quartang, amounted to a massive tax cut, in fact, the biggest in Britain since 1972, 50 years, funded by an incredible expansion and borrowing

Starting point is 00:11:05 with almost no real attempt to suggest that it could be paid for. The quote-unquote mini budget effectively lopped off the top tax bracket in the country. to the cost of 45 billion pounds a year to the British government. Britain and the world literally couldn't believe it. The IMF came out with a massive political rebuke saying that the UK needed to reconsider this tax cut and try to find something that would actually impact the poor and middle income households being the worst hit by inflation and the energy crisis. The pound fell to its lowest level against the dollar ever, almost hitting parity.

Starting point is 00:11:37 Long-dated government bond yields, which move inversely to price, rose in four days more than the annual increase in 23 of the last 20. years. And of course, as we heard, it compelled one of the first major central bank interventions since the central banks of the world started moving towards tightening at the beginning of this year. That was when the BOE stepped in and promised to buy up to 60 billion pounds worth of bonds. Now, the bank wasn't exactly bringing a lot of confidence with this promise, as they had already primed markets to be suspicious, with a smaller than expected interest rate rise the day before the mini budget was announced. What's more, people quickly started to realize that the impacts of this

Starting point is 00:12:10 were more than just on financial markets. According to the Resolution Foundation Think Tank, the rise in bond prices could lead to an increase in annual mortgage payments in the UK of 1,200 pounds over the next year and a half, based on the so-called moron premium of the mini-budget. Subsequently, markets have been roiling for the month since. One of the first political casualties was Kwase-Quarteng.

Starting point is 00:12:31 He was fired last Friday on October 14th. His replacement, Jeremy Hunt, effectively reversed everything that he and trust had talked about the moment that he came in. Again from the Guardian. Quote, Jeremy Hunt has shredded Liz Truss' economic plans in one of the most astonishing U-turns in modern political history, including slashing the energy price freeze which the prime minister had repeatedly championed. The new chancellor dismantled almost all of the platform that Truss's leadership victory had been built on, including the majority of her tax cuts,

Starting point is 00:13:00 and hinted a new windfall tax was in his sights. A move the PM had previously said she would not countenance. But the biggest shock came when the chancellor said he would no longer guarantee energy prices for the next two winters, and that more targeted measures would replace the universal guarantee from next spring after a Treasury review. It means the average annual energy bill will rise to more than 4,000 pounds from April, according to the sector's leading forecaster, and analysts said it could lead to a rise of almost five percentage points in the annual inflation rate. End quote. So now the UK is flummoxed and figuring out who's next. The last thing I read before this recording actually was reports that Boris Johnson was going to stand in again as a

Starting point is 00:13:36 candidate for Tory leadership. Meanwhile, I can't believe I'm about to quote Ben Shapiro in this show, but here we are. He wrote today, Liz Truss's minuscule stint as PM should teach all of us one very important thing. Systemic economic problems created by out-of-control spending over the course of decades are going to claim a lot of scalps and create a lot of volatility across the West in coming years. Now, I think if you are a liberal, do me a favor and remove the created by out-of-control spending. So it just reads, systemic economic problems created over the course of decades are going to claim a lot of scalps and create a lot of volatility. The main point remains that this was not just a British domestic problem. And in the rest of the world, we can see that just like the UK,

Starting point is 00:14:17 political space is being increasingly constrained by bigger forces. What would President Biden have wanted these midterm elections to be about? Certainly not runaway inflation in Russia, but that's where we are. And you can see how it's shaping basically every decision. One of the Big points of conversation this week has been Biden's release of more barrels of oil from the Strategic Petroleum Reserve. On Wednesday, the administration announced that they would further release 15 million more barrels of oil from the SPR. Nominally, this is a response to the OPEC plus announcement that they would cut production, but really, it was about prices. Biden said prices weren't, quote, falling fast enough, and that the drawdown in the SPR could continue into

Starting point is 00:14:53 December and even further if it needed to. Quote, this allows us to move quickly to prevent oil price spikes and respond to international events. Biden also announced that the government would start refilling the SPR once oil fell to $70 per barrel. The goal, of course, was to make sure oil companies kept ramping production. Quote, this means oil companies can invest to ramp up production now with confidence that they will be able to sell their oil to us at that price in the future. Now, as you might expect, this has led to accusations that this is all politically motivated, that higher gas prices are showing up as a major political issue for the Democrats, that inflation has only come down because of the use of the SPR, and that maybe helping people with prices at the pump

Starting point is 00:15:30 isn't really what the SPR is for. Now, I am not here to debate the politics of that. It is way outside the scope of this show. It's not particularly a sophisticated political discourse if you look to Twitter. And there are plenty of other people who will give you all of that juice if that's what you seek to drink. The point I'm trying to make is that right now, all politics everywhere, is fundamentally driven by forces that are quite a bit larger than the domestic issues of whatever place the politics happen to be happening. It makes me think of a famous political quote. In 1992, political strategist James Carville hung a sign in Bill Clinton's campaign headquarters. It read, one, change versus more of the same, two, the economy stupid, and three, don't forget health care. Carville later used the

Starting point is 00:16:12 It's the Economy Stupid line on TV, and it became not only a de facto slogan for the successful Clinton campaign, but a constant reminder for years and years on for politicians. At a time when every economy in the world has been subject to massive exogenous forces that have shattered not only short-term expectations, but also unleashed or accelerated seismic changes in how we work and live and how we consider our strategic alliances and alignments, everyone is forced to race to catch up. And this right now is what politics everywhere is about. Liz Trust tried to do some stuff that normal conservatives would, a big tax cut, and got absolutely hacked because of it, because it ran a foul of the time that she was in, and forces greater than Britain. Meanwhile, she caused boatloads

Starting point is 00:16:54 of chaos and turmoil for markets around the world on her way out, but that's another one of the costs of the moments that we're in. For now, I want to say thanks again to my sponsors, nexus.io, circle and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - A Head of Lettuce Outlasted British PM Liz Truss

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