One of the consistent themes of the Conservative economic narrative is an admiration for the US and its ability to grow quickly. The way it has bounced back from the pandemic and how it has ridden out the impact of Russia’s invasion of Ukraine should serve as a blueprint.
A neoliberal Conservative analysis puts the emphasis on tech, innovation and a myth-like entrepreneurial spirit that the UK would do well to emulate. What it ignores is the way the US economy zips ahead on fantastical stock market valuations and off-balance-sheet accounting reminiscent of the years before the 2008 financial crisis. And how both these habits could bite back in a big way, much as they did in 2008, and pretty soon.
While Europe wrestles in a largely transparent fashion with the fallout of deindustrialisation and an ageing workforce with high levels of welfare and state subsidies (giving rightwing commentators all the ammunition they need to knock slow-moving social democratic societies), the US hides many of its problems.
One of those costs is a looming insurance crisis chronicled by analysts at Bloomberg. It is an off-balance-sheet exercise that ranks alongside student loans and public service pensions for its sheer size, but outranks them for the nightmarish instability of the whole scheme.
The financial data provider has documented the switch by millions of homeowners from private insurers to a “last resort” state-run insurer in areas affected by the climate crisis and the hurricanes, wildfires and floods that rising temperatures bring. Those plans have more than doubled their market share since 2018, and their liabilities crossed the $1tn threshold for the first time in 2022, according to Property Insurance Plans Service Office, a research company that tracks the programmes.
Critics of the way private insurers have offloaded liabilities worry that even a modest wave of claims in any of these states will overwhelm the finances of the scheme. Still, one could argue that when this happens, it will be the US government that picks up the tab, keeping a bad problem relatively self-contained.
A looming banking crisis may not be so easy to stop at the border. Last week, the International Monetary Fund (IMF) warned that US banks were at risk from the impact of high interest rates on the value of commercial property.
Office blocks that have seen their value soar in the last 15 years are now seriously underwater, financially speaking. Analysts have been worried for some time about the huge liabilities on bank balance sheets, but the lack of demand for office space, as a result of the trend for working from home, means a crisis is now imminent.
We all remember how the sub-prime residential property markets of California, Florida and many other US states became a bubble after several years of aggressive mortgage selling to people with low incomes. It burst, triggering the 2008 financial crisis, after a series of interest rate rises meant the mortgages were unaffordable and owners handed back the keys.
The IMF said a “sizable subgroup” of banks were in trouble, “with fears that the failure of one institution could precipitate a broader loss of confidence in the sector”.
It added: “Beyond the unrealised losses due to higher interest, the credit risk carried by some institutions, particularly their exposure to corporate real estate, is at the centre stage of investors’ fears today.”
Staff at the credit rating agency S&P have also signalled concerns about high interest rates, though they make a separate point, saying rising debt bills could trigger a wave of corporate failures in the US next year. At a recent briefing, some of the agency’s analysts said thousands of companies had hedged their interest rate exposure, betting that they could refinance when rates fell back. What if rates only tick down gently? These companies will find their loans unaffordable and go bust.
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Central bank governors in the US, eurozone and UK are expected to cut the cost of borrowing slowly this year. Possibly too slowly.
Another concern is the exuberance seen in US stock markets. Could it be that increases in share values over the last two years, pushing the US S&P 500 to a record high, constitute a speculative bubble and a rout is imminent?
A great admirer of the US, Rishi Sunak appears to believe the UK would be well placed sitting in Washington’s slipstream. That means loosening the constraints on financial companies and banks, letting them join the dash for profit, while running down the capacity of public services, including health.
It also means becoming more dependent on foreign investment and imports of essential goods from countries that have lax health and safety laws, weaker workers’ rights and more autocratic or unstable governments.
Whatever kind of potential shock you care to think about – health, financial or trade – the UK is becoming more, not less, vulnerable.