Diehard proponents of Project Fear are failing to grasp the real crisis

The end of cheap money has unleashed a global meltdown that will wreak havoc on governing parties

There are simply no other words to describe it: the country is being gaslit by the proponents of Project Fear. We are told that Remainers have been vindicated; that the Truss “experiment” is a cautionary tale in the dangers of ideological extremism; that her foolhardy mistakes trace back to the hubris that Brexit unleashed. Apparently, it is now up to “grown-ups” like Jeremy Hunt to take back the reins from libertarian “jihadis” and pursue sensible economics anchored in sound money.

Since there is now a dangerous power vacuum in Downing Street, such a bold attempt to rewrite history is unsurprising. Yet it both denigrates the facts and trivialises the tectonic economic shifts that have plunged this country – and soon much of the West – into turmoil.

First, to be clear, the notion that this crisis was caused by Brexit is bunkum. Britain has been tipped into an inflation nightmare by Covid lockdowns and the accompanying splurges of government funds aided by excessive money printing, as well as the energy turmoil wreaked by the Ukraine war.

Nor is the fiscal strategy of the new Chancellor, Jeremy Hunt, a return to economic prudence. His announcement yesterday was a victory for the destructive neoliberal orthodoxy that favours austerity and balancing the books over generating growth. By sacrificing almost all of Liz Truss’s tax cuts on the altar of market stability, Hunt has ensured that the country will suffer a longer and harder recession. By pursuing spending cuts at the same time as raising taxes, he has allowed the country to be tipped into a doom loop of drained public services and stagnant growth.

Far from escaping the clutches of ideology, Hunt is now doubling down on a neoliberal dogmatism. It started with Osborne’s failed austerity gamble, which had little basis in mainstream macroeconomics, and reached new heights with Theresa May’s decision to make net zero commitments law without bothering with proper costings. It culminated in the last government’s arrogant technocratic belief that it could shut down the economy and then reset it through quantitative easing.

Europhiles may like to quip that Brexit has eaten its own children, but in truth what has just happened is much more profound: technocratic neoliberalism has devoured its supposed mother, Thatcherism. Under the watch of New Labour and then the Tories, liberalisation has unwittingly spawned an overcapitalised economy prone to systemic catastrophe. The principles of sound money have metamorphosed into the elite cults of mass privation and managed decline. Values of freedom and personal responsibility have been distorted into the virtues of unfettered globalisation and collective sacrifice.

Most importantly, the belief that the nation state is sovereign has been usurped by the fundamental tenet of neoliberalism, which is the absolute sovereignty of global financial capital.

In this context, it is more useful to see Liz Truss’s rise and fall as symptomatic of an identity crisis among free-market policy-makers across the West, as they wake up to a world in which they can exist neither as competent technocratic administrators nor as a radical liberalising movement.

This new world is one in which both Thatcherism and the Blairite Third Way are dead. What those commentators suffering from Brexit Derangement Syndrome appear to have missed is that the country is reeling from what many hoped was a transitory crisis, but now seems to be a permanent economic paradigm shift: one in which high inflation is endemic and the welfare capitalist model that has been propped up by cheap credit for the past 20 years is vanquished.

Experts warn, with increasing alacrity, that inflation seems to be endemic and domestically generated. Moreover, any attempt to kill it is being undermined not only by the strength of the dollar, but the financial industry’s vested interests. As the LDI pensions panic and fears of a full-blown shadow banking meltdown suggest, asset managers have recklessly concealed leverage and risk in opaque derivative structures, making large interest rate hikes almost impossible to implement.

With the public unwilling to countenance an official return to austerity, the only scenario left is giving in to endemic inflation, while timidly attempting to hike interest rates without breaking the entire system. It is not just the UK groping towards this grim new reality. The ECB concedes that it is now locked in a battle against a “self-reinforcing” inflationary spiral. The US Federal

Reserve also appears to be losing its battle as core inflation soars and Biden’s landmark “Inflation Reduction Act” tanks.

The consequences for our own country will be shattering. Government departments face a double whammy of permanently reduced spending power on top of severe budget cuts. The British public will be permanently poorer. As public sector workers battle for pay rises, there will be industrial-scale unrest.

This spells a nightmare for Labour, which may soon find itself in power but paralysed by its pledge not to borrow to fund spending. Starmer will be under huge peer pressure to stand up to the markets so that he can boost emergency handouts and public spending. He also faces being steamrolled by trade unions over pay disputes. Arguably, though, Labour can survive if only by “soaking the rich” and reframing the political conversation from recovery to redistribution.

The Tories, on the other hand, have nowhere to go. There is only space for one party of redistribution, which means they need a proposal for growing the pie. The problem is that they have run out of plausible strategies. Sunak’s pitch of prioritising inflation is unachievable. Nor can the party position itself as a slightly less high-tax version of Labour. After all, their unstoppable decline in the polls, including among Red Wall voters, began with the announced increase in national insurance.

More than anyone, Tory Wets and Remainers are one step behind in realising that the world has changed. The Brexiteers and Thatcherites may have been sidelined but there is no going back to the status quo. We are in uncharted territory now.

With the public unwilling to countenance a return to austerity, the only scenario left is giving in to endemic inflation