Introduction to the "Widowmaker" Trade

The story of Nick Leeson, a 28-year-old trader who brought down Barings Bank in 1995, serves as a cautionary tale about the dangers of speculating against the Japanese government. Leeson’s bet that the Bank of Japan couldn’t keep interest rates low after a financial crash led to a devastating loss of $1.4 billion. This event is often referred to as the "widowmaker" trade, where speculators try to outsmart Japanese authorities but end up losing.

The Lesson from Japan

Japan’s unique economic model, with its own currency and a central bank working closely with the government, has allowed it to shape markets rather than being controlled by them. In contrast, Britain has forgotten this lesson, with talk of "bond vigilantes" and the idea that markets can dictate government policy. However, Japan and the UK share some similarities, such as borrowing in their own currency and having floating exchange rates. Yet, Japan has built a resilient economic model around these facts, while Britain has not.

Economic Indicators and Currency Value

The value of a currency is determined by foreign exchange trading, with indicators such as interest rates, unemployment, inflation, and trade flows playing a significant role. However, these indicators can be misleading, and traders’ perceptions can drive market movements. As George Soros noted, traders’ perceptions matter, and are driven less by facts than by whether the government is seen as competent.

Fiscal Deficits and Investment

The UK can and should run fiscal deficits to fund a green industrial strategy, investing in domestic manufacturing, energy security, and a strong export base. This approach would strengthen the economy, reduce inequalities, and reduce vulnerability over time. It would also address the UK’s persistent current account deficit, which is currently offset by short-term capital inflows into property, financial instruments, and speculative assets.

Learning from Mistakes

The downfall of Liz Truss was not caused by borrowing per se, but by doing it for the wrong reasons. Her approach showed a breakdown in basic statecraft, rather than boldness. On the other hand, Rachel Reeves risks making a different mistake by adopting fiscal rules to appease markets but ignoring reality. Instead, the Labour party should be bold and get rid of these arbitrary constraints, focusing on a budget that features a short statement of how government plans will affect the economy.

Conclusion

In conclusion, the story of Nick Leeson and the "widowmaker" trade serves as a reminder of the dangers of speculating against the Japanese government. Japan’s economic model has allowed it to shape markets, while Britain has forgotten this lesson. The UK can learn from Japan’s approach, running fiscal deficits to fund a green industrial strategy and investing in domestic manufacturing and energy security. By doing so, the UK can build a resilient economic model and reduce its vulnerability to market fluctuations. Ultimately, it is up to voters, not markets, to decide what is credible, and the government should focus on creating a budget that benefits the economy and the people, rather than trying to appease markets.