How Labour’s civil war could crash the economy, Liz Truss-style

Here’s how to fix the current political crisis: invite the heads of bond trading from some of the big investment banks to address an emergency cabinet meeting.

They would point to gilt yields – the amount of interest paid – currently heading off into the stratosphere. Long-dated UK government bonds – our 20- and 30-year IOUs – are trading at levels not seen since the late 1990s.

Shorter-dated bonds have been coming under pressure, too, partly because of fears over the inflationary spike Donald Trump’s war in Iran is delivering – and a growing expectation that the Bank of England will have to hike interest rates to counter it.

The challenge the government faces is economic as well as political – and it is profound. So our imaginary address would wrap up with something like “Stop this. Now. Do your jobs. You’re shooting the nation in the foot.”

Too many Labour politicians don’t understand the markets: what they are, how they work, and who’s involved. The bond markets are made up of a vast number of constituents with a wildly diverse range of interests, requirements, views and strategies. There are pension funds, money managers, sovereign lenders, individual investors, and investment funds. You and I are in there somewhere, if you have a pension.

What unites every last one of them is that they make a cold assessment of risk, and of the returns available for taking that risk. They then decide whether Britain is a good or a bad bet.

Right now, Labour’s behaviour makes Britain look like a very bad bet. So, of course, lenders are demanding higher prices to hedge against that risk. This will lead to either higher taxes, which would hurt the economy and infuriate voters, or less money for Labour’s priorities in the long run.

If the UK government were currently knocking on the door of, say, Barclays’ retail banking arm in search of a mortgage, it’d be sent packing and left with no option other than the non-status lenders who put “low credit scores accepted” at the bottom of their ads and then charge a fortune.

Here’s the real danger for Labour, and perhaps this is one for Andy Burnham and the other big beasts jockeying for position to chew on. It might get to the stage where the Bank of England feels the need to intervene, as it did when the Truss crisis was at its worst.

Back then, Kwasi Kwarteng’s tax-cutting “mini-Budget” saw markets panic. To prevent a complete market rout, the BoE pledged to buy around £65bn worth of long-dated gilts. It also confirmed on the same day that it would delay the planned sell-down programme of its government-bond holdings worth £838bn, which was due to commence the following week.

We’re not there yet. But the fact that it’s happened before tells us it could happen again.

That sort of thing is tough to recover from. Look at what happened to the Conservatives at the last election. They still haven’t shaken off the Truss legacy. Perhaps think about that. As one City source said to me, “They just don’t get it. We’re crying out for them to just show some competence, you know?”

The problem for Labour is that it’s not just in the City of London that they’re saying that.