Truss defied the markets, and they ruthlessly sealed her fate

For Liz Truss, the end came Thursday in a midday meeting with grandees of the Conservative Party. But Truss’ fate as prime miner was all but sealed three weeks earlier when currency and bond traders reacted to her new fiscal program torpedoing the pound and other British financial assets.
The market’s swift, withering verdict on Truss’ tax-cutting agenda shattered her credibility, degraded Britain’s reputation with investors, drove up home mortgage rates, pushed the pound down to near parity with the American dollar and forced the Bank of England to intervene to prop up British bonds.
That repudiation, measured in the second–second fluctuations of bond yields and exchange rates, mattered more than the noisy departures of Truss’ Cabinet miners or the hothouse anxieties of Conservative lawmakers that ultimately made her position untenable.

For that reason, world leaders, buffeted economic challenges, are watching the turmoil in Britain with anything but relish, concerned about the stability of Britain itself. Interest rates, energy costs and inflation are rising around the world. Labor unrest is proliferating across borders. Non-British pension funds potentially face the same financial stresses that afflicted those in Britain. The last thing leaders want is for Truss’ woes to be a harbinger for other countries.
Prime Miner President Liz Truss of the United Kingdom meets with President Joe Biden during the United Nations General Assembly at U.N. headquarters in New York on Sept. 21, 2022. (Doug Mills/The New York Times/File)
President Emmanuel Macron of France, who recently mended fences with Truss after she refused this past summer to characterize him as a friend or foe, said: “I wish in any case that Great Britain will find stability again and moves on, as soon as possible. It’s good for us, and it’s good for our Europe.”
Truss, economs said, is correct to argue that markets are driven global trends broader than her tax cuts. Central banks worldwide are raising rates to battle inflation, which has been fueled a surge in demand as the coronavirus pandemic ebbed and a spike in gas prices driven Russia’s war in Ukraine.
“The problems are no means all Truss’ doing, but she should have known that getting blamed for everything comes with the territory,” said Kenneth Rogoff, a professor of economics at Harvard University and a scholar of financial upheavals.

“What is really worrisome now,” he said, is that the situation in Britain “might be the canary in the coal mine as global interest rates keep soaring, especially as they do not seem likely to come down anytime soon.”
Truss long cultivated a reputation as a disrupter and a free market evangel in the tradition of Margaret Thatcher and Ronald Reagan. Her tax cut proposals made her an outlier among leaders of big economies fighting inflation. But she made no apologies for offending either economic orthodoxy or the expectations of financial markets in pursuit of her vision of a “low-tax, high growth” Britain.
The scene outside the Bank of England in central London, Oct. 17, 2022. (Sam Bush/The New York Times)
“Not everyone will be in favor of change,” a defiant Truss said a week ago at the annual meeting of the Conservative Party, even though one of her planned tax cuts, for high-earning people, had already been reversed. “But everyone will benefit from the result: a growing economy and a better future.”
The prime miner’s fatal miscalculation, experts said, was to believe that Britain could defy the gravity of the markets passing sweeping tax cuts, without corresponding spending cuts, at a time when inflation is running in double digits and interest rates were rising.
“It was the combination of the wrong fiscal policy at the wrong time — borrowing when rates were rising rather than, as in 2010s, when they were low,” said Jonathan Portes, a professor of economics and public policy at King’s College London.
He cited what he called Truss’ “institutional vandalism,’’ in particular the way she and her ousted chancellor of the Exchequer, Kwasi Kwarteng, broke with custom announcing sweeping tax cuts without subjecting them to the scrutiny of the government’s fiscal watchdog, the Office of Budget Responsibility.
In that sense, he said, Truss was following in the footsteps of her predecessor, Boris Johnson, who resigned as prime miner barely three months earlier after a series of scandals prompted a wholesale walkout of his miners.
Kwarteng’s budget maneuvering led many in the markets to suspect the government was engaged in a kind of fiscal sleight of hand, which would inevitably require massive borrowing to cover a hole in the budget estimated at 72 billion pounds ($81.5 billion).

Kwarteng, who studied the hory of financial crises as a doctoral student at Cambridge University, brushed off the blowback in financial markets as a temporary phenomenon. Like Truss, he is a believer in disruptive change. Together, they were among the authors of “Britannia Unchained,” a manifesto for a Thatcher-style, free market revolution in post-Brexit Britain. Among other things, the authors described Britons as “among the worst idlers in the world.”
Prime Miner Liz Truss of the United Kingdom addresses the United Nations General Assembly at U.N. headquarters in New York on Sept. 21, 2022. (Dave Sanders/The New York Times/File)
When, or even whether, Britain can fully recover from this period of political and economic turbulence is not yet clear. On Thursday, as news of Truss’ resignation broke, the pound rose against the dollar and yields on British government bonds fell.
Virtually all the government’s planned tax cuts have been reversed, and the next prime miner, regardless of his or her politics, will have little choice but to pursue a policy of spending cuts and strict fiscal discipline. Some fear a return to the bleak austerity of Prime Miner David Cameron in the years after the 2008 financial crisis.
“Rishi or another can steady the ship and calm the markets,” Portes said, referring to Rishi Sunak, a former chancellor who ran unsuccessfully against Truss and may seek to succeed her. “But it’s hard to see how, given the state of the Conservatives, any Tory prime miner can repair the longer-term damage.”
Much of that damage is to Britain’s once-sterling reputation in the markets. Economs have begun mentioning Britain in the same breath as fiscally wayward countries like Italy and Greece. Lawrence H. Summers, a former U.S. Treasury secretary, told Bloomberg News, “It makes me very sorry to say, but I think the U.K. is behaving a bit like an emerging market turning itself into a submerging market.”
That is a humbling comedown for a country that in 2009 announced a $1.1 trillion emergency fund to bail out the global economy.
“If you’re an American fund manager, you’re not going to put Britain in the super-safe category you might have earlier,” said Jonathan Powell, who served as chief of staff to Prime Miner Tony Blair. “It’s not about Britain’s standing in the world, but what category we’ve put ourselves in.”
This article originally appeared in The New York Times.