Liz Truss faces an invidious choice. She can beat a hasty retreat and ditch unfunded tax cuts with the least supply-side justification, and which most alarm global investors.
Or she can persist, leaving it to the Bank of England to defend sterling, and to cope with the inflationary consequence of raw demand stimulus in an economy already operating at capacity constraints. The latter course means a house price crash, and an avalanche of business bankruptcies. It risks a self-feeding downward spiral.
A week ago I wrote that the UK does not face a fundamental fiscal crisis. In the intervening days the Truss team has managed to conjure such a crisis by unforced policy error.
Tax-cutting insouciance in the the middle of a global bond rout has eclipsed even the election of a hard-Right, big-spending, coalition in Italy, the first of its kind in the eurozone since the creation of the single currency, and a catalytic development in a country with an unsustainable debt trajectory. That is quite a feat.
Chancellor Kwasi Kwarteng, who wrote his doctoral thesis on the Recoinage Crisis of 1695, has been unlucky in timing. World markets have gone mad since he stepped into 11 Downing Street.
Scorched earth monetary policy by the US Federal Reserve and the parabolic rise in the US dollar has forced Japan, China, and Korea, among others, to defend their currencies against the dollar this week.
If the definition of ‘emerging market’ currency status is a weakening exchange rate even when yields rise, then Europe is in the same grim company as the UK. The euro and the Swedish krona have crashed too. Real yields in many European countries are comparable to those in the UK.
However, if you stick your neck out during one of these febrile moments in international finance, you will be picked off. “HMG has broken a cardinal rule: don’t look like an outlier relative to other G7 countries,” tweeted Lord Nick Macpherson, former Permanent Secretary to the Treasury.
“The markets now have sterling and gilts in their sights. There will be rallies followed by brief substantive lurches downwards. We probably haven’t seen the bottom,” he said. Did nobody warn the Truss-Kwarteng duo that they were waltzing straight into a tornado?
What we witnessed over two trading days was a particular run on the British bond market. Yields on five-year bonds rose 140 basis points at a time when comparable OECD bonds rose by around 40 points. This is more serious than the fall in sterling. But two cannot be separated.
The exchange rate slide and the sell-off in gilts are at this point acting in synergy. If allowed to fester, this process risks setting off a feedback loop that slips control. Is the Government aware that serious analysts are talking about capital controls, or a flexible credit line from the International Monetary Fund?
The Treasury’s pledge of fiscal virtue in November cuts no mustard. My fear is that the Prime Minister will try to regain fiscal credibility by flagging cuts in spending but this is likely to backfire. Markets can see that this will lead to endemic strikes, and further endanger the Union.
Lord Macpherson says the Government is expecting public sector workers to accept deeper real wage cuts than in 1931 – which led to the Invergordon Mutiny and the singing of The Red Flag by naval crews, and within days triggered the disintegration of the Gold Standard.
“This is an unsustainable equilibrium,” he said acidly. You can convince people to accept sacrifice in the collective interest, but not to fund tax cuts for the 1pc, which the 1pc do not want anyway.
The sudden repudiation of British economic policy has little to do with the energy bailout. Other European states are having to swallow large one-off costs to defeat Vladimir Putin. Pressure is mounting even in Germany for a comprehensive price cap along UK lines.
Nor is it about the reversal of the National Insurance tax rise, or the cancellation of the planned rise in corporate tax. Global markets broadly accepted these measures until Friday. There was certainly no clamour for pro-cyclical tax rises into the teeth of an enveloping global downturn.
Let’s be honest, they aren’t going to admit they fucked it so we are on this burning sled of waste all the way to the bottom.
Why not both ? That’s what we’re gonna get anyway shits fucked.
Is that the Telegraph, cheerleader of No Deal “Fuck the EU” Brexit, bemoaning lack of fiscal responsibility?
To quote a line from one of the funniest things ever on TV, Man Down..everyone out, Mickeys fuck it.
‘or she could do nothing and hope the BoE fix it’
Yeh it’s gonna be that one.
This particular journalist called BS on the mini-budget on Sunday (after it was all obviously a shit show) so now he is digging in
He is the torygraphs “world economics editor”
I do see a scenario where she u-turns (former republican, remainer, “no hand outs”) and sacks Kami-Kwasi but its an outlier
She’s 19 days into a job, most of which has been on recess due to a funeral and ceremonies. In her brief time she’s crashed the economy, the pound, has been condemned by the imf and two members of her staff appear to be caught in corruption stories already. We have multiple strikes, energy crisis, food shortages and hyperinflation to come…all made worse by her actions.
Each pm since Cameron makes the previous look positively perfect. I dread to think who takes over for her in a few months…
Could she please choose the 3rd option and just fuck off?
[deleted]
The problem is that some people want a housing crash. Whether that’s sensible is a different issue, but plenty of people on this sub would cheer if house prices halved.
Go for the housing crash, go for the housing crash . . . !
But they told us this budget would turbo charge the housing market not completely crash it because people couldn’t afford their mortgages anymore?
Liz is bad for biz- I wonder if we are going to have the shortest ever prime minister reign
I mean, the housing market right now *is* a bubble. It has to burst sooner or later, I don’t see why that wouldn’t be under the hand grenade premier.
Give me a housing crash. I’ve got 100K in the bank and deserve a decent house.
Always thought Truss was an idiot. But let’s be fair. Anyone studying the markers will know that a global recession and collapse in the housing market has been building for 3 years. It’s inevitable and universal regardless of whether she reverses herself
17 comments
Liz Truss faces an invidious choice. She can beat a hasty retreat and ditch unfunded tax cuts with the least supply-side justification, and which most alarm global investors.
Or she can persist, leaving it to the Bank of England to defend sterling, and to cope with the inflationary consequence of raw demand stimulus in an economy already operating at capacity constraints. The latter course means a house price crash, and an avalanche of business bankruptcies. It risks a self-feeding downward spiral.
A week ago I wrote that the UK does not face a fundamental fiscal crisis. In the intervening days the Truss team has managed to conjure such a crisis by unforced policy error.
Tax-cutting insouciance in the the middle of a global bond rout has eclipsed even the election of a hard-Right, big-spending, coalition in Italy, the first of its kind in the eurozone since the creation of the single currency, and a catalytic development in a country with an unsustainable debt trajectory. That is quite a feat.
Chancellor Kwasi Kwarteng, who wrote his doctoral thesis on the Recoinage Crisis of 1695, has been unlucky in timing. World markets have gone mad since he stepped into 11 Downing Street.
Scorched earth monetary policy by the US Federal Reserve and the parabolic rise in the US dollar has forced Japan, China, and Korea, among others, to defend their currencies against the dollar this week.
If the definition of ‘emerging market’ currency status is a weakening exchange rate even when yields rise, then Europe is in the same grim company as the UK. The euro and the Swedish krona have crashed too. Real yields in many European countries are comparable to those in the UK.
However, if you stick your neck out during one of these febrile moments in international finance, you will be picked off. “HMG has broken a cardinal rule: don’t look like an outlier relative to other G7 countries,” tweeted Lord Nick Macpherson, former Permanent Secretary to the Treasury.
“The markets now have sterling and gilts in their sights. There will be rallies followed by brief substantive lurches downwards. We probably haven’t seen the bottom,” he said. Did nobody warn the Truss-Kwarteng duo that they were waltzing straight into a tornado?
What we witnessed over two trading days was a particular run on the British bond market. Yields on five-year bonds rose 140 basis points at a time when comparable OECD bonds rose by around 40 points. This is more serious than the fall in sterling. But two cannot be separated.
The exchange rate slide and the sell-off in gilts are at this point acting in synergy. If allowed to fester, this process risks setting off a feedback loop that slips control. Is the Government aware that serious analysts are talking about capital controls, or a flexible credit line from the International Monetary Fund?
The Treasury’s pledge of fiscal virtue in November cuts no mustard. My fear is that the Prime Minister will try to regain fiscal credibility by flagging cuts in spending but this is likely to backfire. Markets can see that this will lead to endemic strikes, and further endanger the Union.
Lord Macpherson says the Government is expecting public sector workers to accept deeper real wage cuts than in 1931 – which led to the Invergordon Mutiny and the singing of The Red Flag by naval crews, and within days triggered the disintegration of the Gold Standard.
“This is an unsustainable equilibrium,” he said acidly. You can convince people to accept sacrifice in the collective interest, but not to fund tax cuts for the 1pc, which the 1pc do not want anyway.
The sudden repudiation of British economic policy has little to do with the energy bailout. Other European states are having to swallow large one-off costs to defeat Vladimir Putin. Pressure is mounting even in Germany for a comprehensive price cap along UK lines.
Nor is it about the reversal of the National Insurance tax rise, or the cancellation of the planned rise in corporate tax. Global markets broadly accepted these measures until Friday. There was certainly no clamour for pro-cyclical tax rises into the teeth of an enveloping global downturn.
Let’s be honest, they aren’t going to admit they fucked it so we are on this burning sled of waste all the way to the bottom.
Why not both ? That’s what we’re gonna get anyway shits fucked.
Is that the Telegraph, cheerleader of No Deal “Fuck the EU” Brexit, bemoaning lack of fiscal responsibility?
To quote a line from one of the funniest things ever on TV, Man Down..everyone out, Mickeys fuck it.
‘or she could do nothing and hope the BoE fix it’
Yeh it’s gonna be that one.
This particular journalist called BS on the mini-budget on Sunday (after it was all obviously a shit show) so now he is digging in
He is the torygraphs “world economics editor”
I do see a scenario where she u-turns (former republican, remainer, “no hand outs”) and sacks Kami-Kwasi but its an outlier
Sundays article: https://12ft.io/proxy?q=https%3A%2F%2Fwww.telegraph.co.uk%2Fbusiness%2F2022%2F09%2F25%2Fkwasi-kwartengs-tax-cluster-bomb-risks-blowing-britains-credibility%2F
She’s 19 days into a job, most of which has been on recess due to a funeral and ceremonies. In her brief time she’s crashed the economy, the pound, has been condemned by the imf and two members of her staff appear to be caught in corruption stories already. We have multiple strikes, energy crisis, food shortages and hyperinflation to come…all made worse by her actions.
Each pm since Cameron makes the previous look positively perfect. I dread to think who takes over for her in a few months…
Could she please choose the 3rd option and just fuck off?
[deleted]
The problem is that some people want a housing crash. Whether that’s sensible is a different issue, but plenty of people on this sub would cheer if house prices halved.
Go for the housing crash, go for the housing crash . . . !
But they told us this budget would turbo charge the housing market not completely crash it because people couldn’t afford their mortgages anymore?
Liz is bad for biz- I wonder if we are going to have the shortest ever prime minister reign
I mean, the housing market right now *is* a bubble. It has to burst sooner or later, I don’t see why that wouldn’t be under the hand grenade premier.
Give me a housing crash. I’ve got 100K in the bank and deserve a decent house.
Always thought Truss was an idiot. But let’s be fair. Anyone studying the markers will know that a global recession and collapse in the housing market has been building for 3 years. It’s inevitable and universal regardless of whether she reverses herself