What Theresa May Have Done

Brexit means Brexit, so we are told. Maybe. Theresa May’s assertion that that is going to be the case, together with her appointment of hard line Brexiteers to the major positions, responsible for negotiating Britain’s exclusion from Europe, certainly give that impression, don’t they? But, here’s what Theresa may have done.
 
 It was suggested that Theresa May, may have been the Jeremy Corbyn of the Tory Party. That is, although she was nominally in favour of Remain, she was a secret Brexiter. I’ll leave aside the fact that such comparisons, made repeatedly by the media, were as much about trying to place Jeremy in a frame, that suited the media’s narrative, than anything based on facts. There seems no doubt to me that Jeremy was in favour of Remain, and his thirty odd public meetings, up and down the country, to packed audiences, once again demonstrated it. What Jeremy quite rightly was not going to do, and what the Tory media, and the Blair-rights could not forgive him for, was that he was not going to play second fiddle to Cameron’s EU agenda, which required an unbelievable, uncritical acceptance of the EU as its stands, rather than a case for remaining on the basis of fighting for a more social Europe, fought for in solidarity with workers and social democrats in other countries. But, no doubt, there will be enough opportunity to discuss that further, in coming months.
 
 The suggestion was that Theresa May was always a Brexiter, and her hardline comments about immigration were an indication of it. But, here is another alternative. May had been in the running to become the next Tory Leader for a long time, much before the referendum was even planned. It had long been known, referendum or no referendum, that any future leader, would be likely to come from the Eurosceptic wing of the party, and that Cameron had been something of an aberration. Many people, including Tories had been surprised when John Major became leader after Thatcher, and he had a running battle with “the bastards”, throughout the 1990’s. All of the leaders that came after him were hard line Eurosceptics. Cameron pipped David Davies to become leader, largely because it seemed that The Tories, who hate losing elections, had taken on board Theresa May’s own warning that they were seen as “the nasty party”.
 
 A large part of that image of them as “the nasty party” came from the fact that their continual internecine fights over Europe, made them appear as what they actually are. That is a party of the past. They are a party whose basis is founded upon defending the privileges of a very, very tiny slither of society. They defend the privileges of the old financial, and landed aristocracy, and all those in society whose immediate concerns are similar, for example, all of those old Daily Express readers, who have convinced themselves that they have somehow become wealthy because their house price has risen 100 fold from when they bought it fifty years ago, and bugger their kids and grand kids, who, by the same token, find themselves, today, unable to buy a house, and forced into expensive private rented accommodation.
 
 Compared to, at that time, a young Blair, who represented “Cool Britannia”, with a modernist, forward looking outlook, that encompassed the Europeanism that many young people, by then, took for granted, the Tories looked like dinosaurs, who would never win another election. It was then understandable that the Tories, desperate to break their succession of election losses, would feel they had to bite their tongue, and choose the less Eurosceptic Cameron, over the hard line Davies. Even then Cameron could not win at first time of asking, and only scraped in at the second attempt, much to his own surprise. He had rather hoped to retain the cover of the hapless and witless Liberals against his own set of “bastards”, who were once again getting restless, spurred on by UKIP.
 
 So, if May was to become leader, once Cameron had handed in his own notice via the media, at the previous election, she must have known that her chances only existed on the basis of being Eurosceptic. But, that posed a further problem once Cameron was forced into actually calling a referendum, by his own unforeseen election win. If May came out decisively for Brexit, but the referendum, as all the pundits believed inevitable, was significantly, or even marginally for Remain, she could have queered her own pitch.
 
 A win for Remain would have seen Cameron stay on until 2020, or thereabouts. In the meantime, had May come out for Brexit, the other main contender, Bojo, could have come out for Remain. That would have put Bojo in the front seat, on the winning side, whilst May would have been seen as disloyal, on the losing side, and probably shunted from high office by a victorious Cameron. No Tory leader is likely to be elected unless they are already in some senior position, as the current contest has shown.
 
 The reality is that no Tory leader is likely to be allowed to remain in position who is truly Eurosceptic. The party is based upon all of those old conservative ideas and interests, that drive its membership and voter base, but, in the end, as one of the main parties of British capital, it is constrained by what is in the long-term interest of that capital. Some sections of that capital, particularly those sections of small private capital, might believe that Britain is still a major power, and that it will thrive outside the EU, but the reality is quite different. In the end, Brexit is unlikely to happen, and the only question is how that is brought about.
 
 By being in the Remain camp, May hedged her bets. The likely outcome was a vote to Remain, in which case, she would keep her position. But, by being hardly visible during the referendum, and making her comments about immigration, she left her route back towards the Eurosceptics open. She undoubtedly saw that as a longer term strategy, to come into play around 2020, when Cameron stood down, but it worked equally well, when the vote was for Brexit, and Cameron stood down immediately.
 
 But, given the fact that May herself had recognised the limitations of the Tory Party with her previous statements in respect of “the nasty party”, its unlikely that she is actually an ardent Eurosceptic, or if she is, she almost certainly understands the limitations of such a position. The same is almost certainly true of Bojo. No one really believes that he is a Eurosceptic. He adopted the position solely for internal Tory Party strategic reasons.
 
 Theresa May’s decision to make Bojo Foreign Secretary is similarly motivated. Having come out for Brexit, May has put him directly in the firing line. Every day, he now has to justify and advocate that position. Bojo is renowned for being rather lazy, and in this position not only will he soon be seen not to be on top of his brief, but he will continually have to run to keep up with apologies for all of the previous gaffs he has made, as happened last week over Turkey, with his press conference with Kerry, and so on, not to mention all of the new gaffs he is likely to make. May has given him the rope, and the stool that Bojo will hang himself with, and thereby remove a challenge to her longer-term position.
 
 But, the other appointments are of a similarly strategic nature. She has appointed David Davies to be in charge of the new Brexit Ministry, and Liam Fox, to work closely with him, as new International Trade Minister. Both are hard line Brexiters, and everyone knows they both hate each other. Whilst its possible to argue that in appointing Bojo, Davies and Fox to these Brexit facing ministries, May has shown her commitment to carrying out Brexit, because Brexit means Brexit, its also possible that what she has done is to say to these leading Brexiters — “You broke it, you bought it.” That after all is what Cameron himself did, by resigning, immediately after the referendum result.
 
 In the weeks after the referendum result, the Pound has sunk significantly, and looks set to reach parity with both the Dollar and the Euro. That will push UK inflation up significantly, at a time when, oil and other primary product prices are already heading back higher, as the previous gluts get drawn down. The talk currently is of the Bank of England cutting official interest rates, and engaging in QE, but with the UK having its credit rating cut, with the UK trade deficit at record levels, and likely to worsen, as the Pound falls, and import costs rise, as a country reliant on the benevolence of strangers, it is likely to see its actual borrowing costs rise, not fall, whatever the Bank of England does.
 
 As actual market rates of interest rise, and as lending itself becomes tighter, whilst living costs rise with rising inflation, an immediate consequence is going to be sharp falls in property prices. Already, commercial property prices have fallen by around a third, and speculators in at least eight UK based property funds, have been told that they cannot get their money out, or can only do so on the basis of losing a large chunk of the money they put into the fund. That is a major problem of speculating in property, as buy to let landlords, and others will find. It is an illiquid asset, which means that when you want to sell, you can’t. Everyone else tries to sell at the same time, and so prices crash.
 
 All of those old Daily Express readers, will start to feel very aggrieved, when their presumed wealth turns out to have been a mirage, as house prices crash, and their savings in various funds and trusts face similar collapses in their value.
 
 In similar vein in May’s appointment of the previously anonymous Andrea Leadson to the Agriculture Ministry. Leadson, like all of the Brexiters had made endless rash promises during the referendum campaign, about all of the money that would flow to this or that area, once the £350 million per week was not going to Europe. Leadsom had promised UK farmers, who do rather well out of the Common Agricultural Programme, and other EU funding, that the UK outside the EU would continue to provide them with all of the funds they required, in place of EU funds. Again, May’s appointment of her to that post appears to a matter of “You made these promises, now you can explain why you are not keeping them.”
 
In other words, May has put a string of Brexiters into positions where they will be held responsible for not making good on the referendum promises they made. The only exception there seems to be in relation to Theresa Villiers and Northern Ireland. Villiers claims that Brexit would not affect the border between Northern Ireland and the Republic, or all of the elements of the Good Friday Agreements, and so on that flow from it, were wholly irresponsible. Its quite clear that if Brexit were to go ahead, either a hard border has to be established between the North and the South, or else a hard border has to be established between the whole of Ireland, and the UK mainland. In practice, only the former would work, and that will cause all of the developments since the Good Friday Agreements to start to unravel.
 
 By putting the hard liners Davies and Fox in the front line of the Brexit negotiations, May has created the conditions under which the EU is likely itself to take a hard line in response, even if that was not likely to have been the case, as the EU protects its own greater interests. Davies and Fox, really are true believers. They still live in a fantasy world of the British Empire, and are deluded enough to think that outside the EU, the world will beat a path to Britain’s door. The only reason other countries may do that will be a) to ask for all of their loans back, b) to try to sell Britain even more of their cheap commodities, as UK capital floods out to pay for them, and c) to buy up increasingly cheap British companies and assets, made even cheaper as the Pound collapses, as happened last week with the purchase of ARM. Having bought these companies, the foreign buyers will then transport the technology, business and profits to their own country, or to EU based operations, before eventually closing down the UK business.
 
 But, because Davies and Fox live in this fantasy world, they seem to think that the path ahead lies merely in them drawing up their set of demands of what they want the UK’s relationship to the EU to be, and then going to demand it be given to them! The EU negotiators are likely to tell them quickly where to get off. Davies and Fox will get worse than nowhere, because the UK really has no hand to bargain with. May if she really wanted to stuff her opponents, should initiate Article 50 now, and make them start negotiating, which would show that they actually have no clue about even what they want, and that the whole referendum campaign was a fiasco from start to finish.
 
 But, there is a reason why May has not initiated Article 50. By holding back, the initial drops in the UK stock market were halted. Some of that is a mirage. The FTSE 250 has barely recovered the significant losses it suffered. The FTSE 100 recovered only because it is comprised overwhelmingly of large companies, such as oil companies and miners, who make most of their profits from overseas operations, often priced in dollars, which then translates into a larger number of pounds, given the sharp fall in the Pound against the dollar.
 
 In the meantime, May has given some indication of her actual likely direction in her speech outside Downing Street, after her appointment. The reason for not appointing a hard line Brexiter to Northern Ireland, is probably because she recognises the danger that Brexit represents to the break-up of the UK, a point she made in her speech, and reinforced by her early visits to both Scotland and to Northern Ireland. But, May also made comments about corporate governance, a subject I have written about at some length over the last year or so.
 
 Across the globe, there is a growing recognition that the old Monetarist policies no longer work. Its much like the way in the late 1970’s, after several years when it was obvious that the old Keynesian policies did not work, it took several years, until that translated into a general acceptance that some new strategy was required, which turned into the adoption of Austrian policies by Thatcher in the early 1980’s, followed by Friedmanite Monetary stimulus in the late 1980’s, and throughout the 1990's.
 
 There is now a growing acceptance that large scale fiscal stimulus is required to provide the necessary mechanism by which huge amounts of liquidity, currently sitting sterile in bank vaults, or on company balance sheets, can be fed into the economy. But, there has been a growing recognition that whilst governments can undertake such spending, to promote aggregate demand, the real basis of economic growth is that companies themselves engage in productive investment. Part of the reason they have not, is that policies of austerity, combined with the huge overhang of private household debt, built up over the last thirty years, has meant that businesses have not seen much indication that consumption was likely to expand very much. They were able to meet the normal growth of consumption from their existing capital, and that is especially the case, as the large majority of the economy nowadays involves the provision of services rather than material production.
 
 But, the other reason that companies have not invested is that all of the QE has boosted financial asset prices, and it has put a floor underneath. The consequence of ever higher asset prices, with only slowly growing masses of profits, has been that the potential to pay interest (dividends, coupon etc.) has declined. The same thing has been seen in relation to property. As property prices bubbled to ever more astronomical levels, even as rents rose, the rental yield (the relation between the rent and the property price) continually declined. The speculators, therefore, increasingly lost interest in obtaining income on the loaned money-capital, and instead became fixated by ever larger paper capital gains on their financial assets.
 
 Instead of using profits for productive investment, the representatives of shareholders on company boards, pushed through continual rises in dividends. According to the Bank of England’s Andy Haldane, in the 1970’s, the average proportion of profits that went to dividends was around 10%, whereas today it is around 70%. Yet, despite that rise, the actual dividend yield, like bond yields has fallen to next to nothing. There is really no justification for buying any of these financial assets in order to obtain an income — in fact, in many part of the world, the return on bonds out for the next ten years is negative! — the only justification is to keep making paper capital gains, as the prices of the assets are pushed higher. To bring that about, companies have also used profits to buy back stock, and even borrowed money on the bond market, to use to buy back stock, and thereby push the share price higher.
 
 But,that is unsustainable, and it is increasingly apparent that it is unsustainable. When people are paying to lend money, when the prices of shares, bonds, and property are at astronomical levels supported by nothing, it is obvious that sooner rather than later, that bubble will burst. The more than 30% drop in commercial property prices shows what is likely to happen.
 
 In order for money lenders to get more in interest, profits have to rise. In order for share and bond prices to rise, or not collapse, whilst interest rates can fall no further, and are likely to rise, again profits have to rise. But, for profits to rise, firms have to engage in productive investment, they have to accumulate capital, because it is that accumulation of capital that is the basis of increased masses of profit. It seems a chicken and egg situation, which is why it has persisted for so long.
 
 Last year, Andy Haldane, and Hillary Clinton within days of each other described this situation, and talked about the need for reform of corporate governance. Now, Theresa May has made a similar comment, talking about the need for workers to be on company boards. That is not a particularly revolutionary proposal. The proposal for such worker directors was proposed by the Frankfurt Parliament back in 1848. Germany has half the members of the supervisory boards of its companies elected by the trades unions, and proposals for such industrial democracy were made in both Britain and the EU, during the mid 1970's.
 
 May, may be raising such proposals to discipline UK company boards into action. Its unlikely to work, as Harold Wilson found with proposals for voluntary planning agreements. However, it gives an indication of the direction of travel. On the one hand, May is setting up the Brexiters to fail, whilst making moves for fiscal stimulus, and pressure on companies to increase investment, to get the economy moving, and thereby take credit for herself. But, the price of such increased investment — as opposed to the financial speculation seen over the last thirty years — is that interest rates will rise, and as interest rates rise, stock, bond and property prices will fall sharply. She will place the responsibility for that at the door of the Brexiters.
 
 Expect, the election in 2020 to be fought on the basis of the need to remain in the EU.


Originally published at boffyblog.blogspot.co.uk on July 25, 2016.

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