• Finlay Healy

Bankrupting the Blue Wall: Rising interest rates spell disaster for the Tories


Boris Johnson and Rishi Sunak present a joint press conference together in 2021.

We all know that the money whirring around the financial hubs of the global economy is not ‘real’. It cannot be realised in hard currency. Much of this money, or liquidity, sloshing around, rides a wave of debt, and props up ludicrous valuations across asset classes. We are very much ‘dancing on a volcano’. When the music stops, this mirage of wealth (or ‘fugazi’) held in liquidity’s outlets, even amongst the choicest assets, will dry up. But this mirage is meaningful to the many whose livelihoods are in part loaned off the appreciation of their assets – principally their house. The evaporation of this financial security will spell electoral turmoil for those political parties who have canvassed on the democratisation of comfortable wealth. Here, that is the Conservatives.

And hovering at the stop button are the major central banks poised to tighten the conditions of borrowing. In the past month the Bank of England has raised rates by 0.25%; the US Federal Reserve by treble that amount.

Why do interest rate rises commit such violence to the value of assets? Raising interest rates, radiating outwards from the principal spigot of the monetary system, the central banks themselves, makes credit costlier by making it scarcer. Moreover, as the nominal interest rate is raised towards and beyond the economy-wide rate of return that one might expect on an investment, the incentive to borrow disappears.

Whereas a credit crunch depresses asset prices by curtailing the amount of credit that can be ploughed into purchases, the status quo ante was one of a credit glut. Injections of liquidity by major central banks in the wake of the Great Financial Crisis amounted to $16.4trn. Concomitant to such a surfeit of credit was an asset price boom: a new round of monetary easing raised the wealth of billionaires by $1.9trn in 2020 accordingly. Easy credit loosens the anchor between asset prices and economic fundamentals (the demand economic agents might muster without leverage). The heady spiralling of prices is licensed by such conditions and kept in an upwards trajectory as expectations – of cheap money as well as of the result in ever-increasing asset prices – become entrenched.

The result is a house of cards built atop expectations – distorted expectations legitimated and realised by a licentious monetary policy. As Daniel Apert put it, ‘what is the value of a capital asset at a zero cost of capital’. The rhetorical question implies the answer is infinite (we might whisper that infinity sounds worryingly close to valueless).

So, asset accumulation depends on easy money, and thus interest rates rises threaten the price of assets. But it does not necessarily follow that asset deflation would be disastrous for the Tories. What makes the precarity of this credit fuelled asset bubble so dangerous is the salience of asset values. For many, the asset boom has taken the place of income from labour or the public provision.

Administered under successive governments of all stripes across the globe, access to relentlessly and increasingly valuable assets is neoliberalism’s welfare policy. This was what Colin Crouch termed ‘privatized Keynesianism’; where the asset-heavy balance sheets of private individuals and families would take the place of debt-financed expansionary fiscal policy to sustain aggregate demand. Ever since the Volcker shock of the early 1980s, the vertiginous hiking of interest rates in the US, and analogous monetarist experiments in the UK broke the back of wage-induced inflation, interest rates were safely returned to lower levels now in the service of asset price appreciation. Central banks and marketised finance made clear their unwillingness to finance Keynesian style Fordist welfare (an unwillingness Alan Greenspan made explicit to Bill Clinton), and thus the welfare of many has hinged upon the rising price of the assets they own. This is ‘asset-based welfare’. Whilst presidents Clinton and W. Bush nurtured a debt-fuelled housing boom, Tony Blair made his aspiration a ‘democracy in which ownership of wealth [through assets] is open to all’.

The resultant policy programme which sought to diffuse asset ownership was predicated upon the democratisation of finance. Low rates would draw in those left out of financial capitalism. Neoliberal hegemony could be established by papering over the distinction between capital and labour, ceding to as many as possible a stake in a new rentier economy, in which a virtuous cycle of credit, rising asset prices, and in turn more collateral to raise more credit would apparently ensue.

In the UK, a panoply of policy has made credit easier and juiced housing demand amid constrained supply. The Help to Buy mortgage Guarantee scheme meted out £12bn of guarantees for £130bn worth of mortgages. That scheme has increased both the amount and price of credit chasing housing assets. Earlier incarnations of Conservative government offered the Right to Buy scheme, giving up to £16,000 discount on the purchase of one’s public housing. This reduced the social housing stock by 2 million; more than enough to fill the current waiting list of over a million. This is the neoliberal edifice; the house of cards; a get rich welfare scheme. Its collapse would have devastating consequences, not least for the electoral prospects of the political parties who have staked their appeal on the wealth delivered to their constituents.

But the political economy of neoliberal welfare created what John Kenneth Galbraith might have called an ‘atmosphere of private opulence and public squalor’. The double danger for the Conservatives is the end of private opulence; and thus the exposure of its hitherto well-heeled voters to public squalor. Public money, as shown above, in this new social consensus was simply not spent on the traditional components of public provision (cash welfare for instance), but was diverted to underwriting, guaranteeing, and ‘de-risking’ debt dependent asset accumulation and speculation. The Conservatives and New Labour commanded governments of ‘state rentier capitalism’.

When liquidity is withdrawn from asset markets, as interest rates rise, asset prices will deflate. Consequently, the rewards people have been able to extract out of their assets – the rentier’s dole if you will – will stop flowing. Many will accordingly re-assess their financial situation, and in the context of a sagging pay packet, will find themselves considerably poorer after being deprived of the ability to leverage their earnings to secure a standard of living beyond their means. The Tory party’s electoral coalition will feel this acutely, as it is composed mostly of people who haven’t done too badly at all from the era of ultra-low interest rates.

Evicted from the assuredness of capital gains ad inifinitum extracted from the safe haven of their private assets, people might once again find much to criticise in the pay puzzle of the Cameron government’s jobs boom, and the vandalism of neglect inflicted upon the now tatty public sphere. Indeed, the public provision is in tatters: a 14% rise in hospital cancellations from 2009 to the pandemic’s onset; a 3,772% rise in food parcels delivered by food banks in the decade after 2009; with a simultaneous 60% cut in local government funding from Westminster, forcing the sale of over 12,000 public spaces by councils. The sites of private asset accumulation, of public services, of labour, and commodity exchange look decidedly rundown. The discomfort inflicted upon the hitherto comfortable Tory voter will likely incite electoral disaster for the Tory party, as the mirage of people's wealth dries up.

Nationally, 48% are indifferent to house prices, and 21% think it would help if they fall. For Conservative voters, 25% would favour price rises, and in June 2019 – before their new cohort of voters in traditionally Labour seats in the north – that figure rises to 34%. It is these people, one crucial component of the Conservative electoral coalition, that stand most to lose from rising interest rates and asset deflation. No wonder Boris Johnson is said to fret about the voting intentions of the ‘Waitrose Woman’. And he should be worried, given elections are won increasingly on the margins: the Conservatives triumphed in 2015 by focusing on only 200,000 voters. Of course, amidst the wrenching correction in asset prices, and the crumbing of the neoliberal edifice, the bisection of the Tory voting coalition will be the least of our worries.

Image: Flickr / Number 10 Downing Street