Great economic chaos in the UK

Stocks in the US tumbled again on Monday, pushing the Dow Jones Industrial Average into bear market territory — since it peaked early this year, it is now down more than twenty percent. The Fed’s intention to eliminate inflation The interest rate hike is raising investor concerns, as well as the rapid decline of the British pound in the foreign exchange markets. On Monday, a senior Federal Reserve official, Rafael Bostic, took the rare step of criticizing a foreign ally, say British government new package The tax cuts, which sparked a sell-off in sterling, “really added to uncertainty”.

Leave an idea, if you will, to the patriotic Britons. Having just buried Queen Elizabeth II, their last remaining link to a time when their textbook maps showed vast swaths of the earth’s surface painted imperial red, they now face a humiliating currency crisis. In Asian trading early Monday, the British pound hit an all-time low of $1,035 against the US dollar. As trading shifted to Europe, the turbulent currency rebounded slightly amid speculation that the Bank of England would announce emergency interest rate hike to strengthen the pound. On Monday afternoon, currency depreciation resumed after the Bank of England Announce that there will be no price increase But she said she might enact one at her next policy meeting, which won’t be until November.

This statement did not impress the global market, which has been dumping British assets since Friday, when the new Conservative government became Les Truss He unveiled a comprehensive set of tax cuts that will be financed by additional borrowing. This costly stimulus package came on top of the previously announced energy price rescue for households and businesses, which in itself came on top of the necessary but costly efforts by the previous government, led by Boris Johnson, to protect the British economy from Corona virus disease. It also came at a time when the UK inflation rate was close to 10 per cent, and the Bank of England was struggling to bring it down.

Massive tax cuts are heavily skewed towards the rich It would amount to nearly 2 per cent of Britain’s gross domestic product, introduced by Kwasi Quarting, the new Chancellor of the Exchequer, as part of a broader effort to boost the UK economy’s underlying growth rate. Many independent commentators have condemned them as vulgar economists. Paul Johnson, director of the nonpartisan London-based Institute for Fiscal Studies, says it’s “the biggest package of tax cuts in 50 years without any semblance of trying to boost fiscal numbers.” He said. The harshest sentence came from Larry Summers, a former US Treasury secretary. “I am very sorry to say, but I think the UK is behaving a bit like emerging markets turning themselves into an immersed market,” Summers said. Tell Bloomberg. He added that if the Truss government sticks to its new policy, the value of the pound may drop to less than a dollar.

I don’t always agree with Summers, but in this case it’s hard to argue with him. A characteristic of emerging market economies is that investors tend to be suspicious of their public finances and demand additional compensation in exchange for holding their government’s debt. This is what happens to UK bonds. On an average trading day, bond yields may change by two or three percent of a percentage point. Since Friday, the yield on British 10-year bonds has jumped by much more: from 3.46 per cent to 4.28 per cent. Paul Donovan, chief economist at UBS Global Wealth Management, told The Wall Street Journal. “Web, you see the magical money tree I just planted – we’re taking a chainsaw to it.”

Another characteristic of emerging market economies is that their currencies sometimes depreciate even when interest rates are raised. This also happens in the UK. Last week, the Bank of England raised the sovereign interest rate for the seventh time in a year, to 2.25 percentHowever, this did not prevent the subsequent decline in the pound, which left the head of the bank, Andrew Bailey, in an awkward position. A fall in the British pound makes Britain’s imports more expensive and increases inflation. This puts pressure on the Bank of England to raise interest rates to ease inflation: in its inflation statement On Monday, he said he would “not hesitate to change interest rates by the extent necessary to bring inflation back to the 2% target.” Meanwhile, the Bank of England said last week that the British economy had already entered a recession. A further rate hike is likely to make the recession deeper and longer. The British people will suffer.

In other words, thanks to Truss and Quarting, Britain found itself in another economic mess, that mess Some of the commenters They even compare that to the 1970s, when high inflation and pressure on sterling forced Jim Callahan’s Labor government to go, handy, to the IMF for a bailout. To help finance the fiscal and trade deficits, the country is counting on foreign investors’ confidence in British assets. If their desire to buy British debt evaporates, the drop in sterling could more than double, bringing with it the risk of a major financial crisis – or, more likely, a drastic intervention by the Bank of England.

The tragedy is that all this is unnecessary. Although Britain has gone through many ordeals in recent years, it is the sixth largest economy in the world, has a stable political system, and London is one of the largest financial centers in the world. If its government were reasonably competent, the risk of a financial blowout would be minimal. Unfortunately, this basic civil requirement was not met.

In the past six years, the Conservative Party has shed economic skepticism, embracing wishful thinking and self-sabotage. After the Brexit vote in 2016, it joined the claim that leaving the EU, lifting trade barriers to Britain’s largest market, and preventing motivated European workers from crossing the English Channel and taking jobs that employers were struggling to fill, would It helps the economy in some way. . Now, under Truss and Quarting, the new Tory government has embraced a warmer version of Reaganomics, asserting that deregulation and tax cuts for the wealthy would raise Britain’s medium-term growth rate to 2.5 percent. The Independent Office for Budget Responsibility estimates the rate is much slower than 1.75 percent. Such a large increase – nearly fifty percent – seems unlikely.

The government has not subjected its tax package to inspection by the Balance Sheet Office, which was set up by George Osborne, a former adviser to the Conservative Party, to provide some external scrutiny of public finances. Ahead of Kwarteng’s announcement last week, the Office of Budget Responsibility offered to make new economic forecasts that include the proposed tax cuts. The government said no. This was advice that Trussonomics was on the rise – and financial markets took notice.

On Monday, Kwarteng, who has a A Ph.D. in economic history From Cambridge, he sought to fix things by saying he would unveil a comprehensive mid-term strategy, complete with new forecasts from the balance sheet office, On November 23. But that’s nearly two months, and it’s forever in the financial markets. Long before that, something might give. ♦

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