by m33k44 on 9/29/22, 9:19 AM with 226 comments
by hunglee2 on 9/29/22, 10:04 AM
The obvious incoherency of this then led to the markets losing confidence in the UK economy, crashing the value of the pound, which in turn makes the planned UK debt funded tax cut plan even more expensive than it already needed to, leading to even more loss of confidence.
We are now in cascading crisis, from which there are no good option, only worse and terrible ones.
by scrlk on 9/29/22, 10:17 AM
There's a good article in the Financial Times that explains the mechanics behind it ("LDI: the better mousetrap that almost broke the UK"): https://www.ft.com/content/f4a728a5-0179-48bd-b292-f48e30f86... (archive link: https://archive.ph/vRrGk)
tl;dr from the article:
"Well, the cruel irony is that pensions needed collateral for margin calls on leveraged trades hedging against big moves in . . . UK government bond yields.
So pensions sold bonds (among other things) to raise that cash, pushing yields up, making hedging trades even more expensive, and requiring even more collateral.
If the BoE hadn’t stepped in to arrest the declines, pensions may have defaulted on those contracts, which would have been very bad. That isn’t the same thing as going bust – it’s not like all the investments disappear overnight – but it does risk tying up the pension in a knotty legal fight over settling the default."
by gerikson on 9/29/22, 9:51 AM
by pyb on 9/29/22, 9:32 AM
The UK central bank, the BoE, is forced to take measures to counteract what Truss and her government are doing !
The market is also strongly reacting against Truss by selling the pound.
by JonChesterfield on 9/29/22, 10:07 AM
I really hoped the new leader would be the one with an economics background instead of the friendly optimist. Navigating out of brexit and covid is difficult and the leader sets the tone for how we're going to approach it.
The market deciding the UK is financially unsound seems a legitimate response to our strategy of copy the wise ostrich. Hopefully the people who chose Truss have made enough of a loss this week to reconsider their priorities.
by neximo64 on 9/29/22, 10:23 AM
Came as a surprise, in a nonscheduled budget & was the opposite of what was expected.
That got the gilts (uk bonds) to drop, and that got the currency shocked as the gilts were force liquidated. I wouldn't read too much into the currency bit, as every other currency is down against the USD, including the euro, yen and aud.
by sixhobbits on 9/29/22, 10:11 AM
by emptyfile on 9/29/22, 10:16 AM
However, if your currency is NOT the US dollar, then its a catastrophically bad idea.
In short: Truss and Kwarteng are intellectual lightweights whose economic ideas make for funny reading* but in reality are a recipe for disaster. Their line of delusional thinking can be traced directly to Brexit, when the UK lost their collective minds.
by bvoq on 9/29/22, 11:14 AM
by fffobar on 9/29/22, 10:18 AM
by andy_ppp on 9/29/22, 10:10 AM
by guilhas on 9/29/22, 1:19 PM
2020 was record money printing, causing inflation, so Liz Truss set a plan to reform quantitative easing to try reduce inflation, and the markets reacted bad
The age old question, are banks to big to fail? What will happen to saving, mortgages, pensions etc... if you start restricting bailouts? Maybe some will just take their money to EU where they still have a cushion, in the always win casino
But no doubt reform is needed
by caoilte on 9/29/22, 10:07 AM
Interest rates are now expected to triple to 7% to cope with this fiscal event and as most UK home owners borrow money on revolving short term loans to buy houses many people are looking at a $1,000-$2,000 / month increase in interest payments and a 20% collapse in the value of property.
Most major businesses have gone into crisis mode (hiring freeze, paused expansion plans) which will have its own knock on consequences. If we're very very lucky it won't spread to other countries.
by thewarrior on 9/29/22, 10:00 AM
It has solved this problem over the years by borrowing and becoming a haven for investment to cover up the shortfall.
Now we have a bat shit government that says we need to lower taxes and borrow a boat load of money to tide over the energy crisis. The markets don’t see how this borrowing will improve the UKs ability to earn more dollars (or the govt to raise more taxes).
In essence the market realizes that the UK is going to repay its loans by printing money.
Hence the pound tanks in anticipation of it. One way to stop this is to raise interest rates and pull pounds out of circulation but the government is terrified of popping the real estate bubble.
TL;DR - The pound will keep falling and the UK will lose its social services but don’t take this as investment advice.
by Al-Khwarizmi on 9/29/22, 10:21 AM
by yieldcrv on 9/29/22, 10:18 AM
Pension funds require new investors to pay off old investors - pensioners - until the pensioner dies, we have a word for that concept but it derails discussion.
Some large pension funds in the UK had borrowed against their investors capital, specifically for riskier speculation, which is necessary to guarantee the returns to the investors (pensioners).
The volatility in the currency and specifically UK government bonds (GILTs) caused a collateral call on the pensions, which would have first caused forced selling, a cascading pressure on the bonds and currency, and also eventually bankrupted the pension (which could honestly still happen).
by roenxi on 9/29/22, 10:47 AM
Typically these slogans seem to mean that a politically significant number of people are losing their jobs, but simultaneously used as cover to print money and give it to the wealthy. But I don't think that is what is meant right now in the UK.
by switch007 on 9/29/22, 7:18 PM
They're quite obviously doing a smash-and-grab on the country for their remaining time in power.
by r721 on 9/29/22, 10:31 AM
>How not to run a country - Liz Truss’s new government may already be dead in the water
https://www.economist.com/leaders/2022/09/28/how-not-to-run-... (no paywall: https://archive.is/QWtQW)
by account-5 on 10/1/22, 8:21 PM
The public after Boris went: "thank the gods that idiot's gone, nothing could be worse!"
The conservative party: "we really need to lose the next general election! We don't think Boris managed that."
Truss and Kwarteng holding hands: "hold our beers! LEEROY JEEENKINS!!"
by markus_zhang on 9/30/22, 10:37 PM
by BerislavLopac on 9/29/22, 10:32 AM
This has been going on for a while, but even Johnson wasn't as directly controlled by this group. They took the opportunity to get rid of him and put Truss to the PM's position, making sure that she will do exactly as they tell her.
by kepler1 on 9/29/22, 10:15 AM
In the longer-term, is it the slow accumulation of a thousand cuts?
-- Brexit
-- Stagnating physical output of UK industry (aside from finance + healthcare)?
-- Aging population
-- Expensive living costs + recent inflation
I don't know how much each of these factors has contributed, or if there are other important factors missing above. But for me, having lived there and seen the general situation, the question is, how will the UK renew itself as a country from a long century of gradual decline?
by viraptor on 9/29/22, 10:08 AM
by icare_1er on 9/29/22, 9:57 AM
I though markets reacted negatively to socialist governments getting into power, not the opposite.
by kypro on 9/29/22, 11:01 AM
If your fiscal plan doesn't make sense market lenders may not be willing to lend to you or will at least expect a higher interest rate to compensate for their risks.
The Conservative party in the UK has just elected a new PM who has announced a fiscal plan which doesn't add up - tax cuts financed with borrowing.
Worse still the PM is doing this in an effort to boost growth which only adds to current inflationary pressures at a time where inflation is far too high.
Given this the market now believes the central bank will need to be much more aggressive in their fight against inflation and raise their base rate much higher.
In addition to this the market is also sceptical of the governments fiscal policy and is demanding a higher risk-premium to lend money.
The result is sky rocketing borrowing costs for UK consumers, businesses and the UK government.
Pension funds are one of the largest holders of government bonds as they're typically seen as very safe investments (especially within developed markets).
But of course every investment still has risks and when those risks are underestimated it can leave a lot of investors on the wrong side of the trade very quickly.
As large holders of government bonds many pension funds found themselves in this position and my understanding is that some have been on the verge of blowing up in recent days.
Obviously were pension funds to blow up on mass this would have all kinds of negative knock-on effects for the economy.
It would also mean many of these funds would become forced sellers of bonds and this forced selling would have added even more volatility and instability to an already volatile market.
Basically the UK was at risk of at risk of a GFC style blow-up so to restore stability the BoE was forced to step in yesterday to buy bonds that no one in the market wants to own right now.
Interestingly today the PM is doubling down on her fiscal policy. But then she has some fairly controversial economic views, including the belief that higher interest rates is a good thing.
In my opinion she's too naive and ideologically driven to understand what she's doing. At the end of the day the BoE can't make a broken fiscal policy work, they can only buy time.
If the government doesn't reverse course the UK economy is probably going to implode, but as I say we have a PM so ideologically driven that she may actually see this as a good thing - it's just free-market capitalism cleaning out the weak-hands, etc.
Although it's probably electoral suicide my guess is the Conservative party will need to step in at some point and force her to back down in one way or another. If they don't it's hard to see the public will forgive them for this anytime soon. Especially considering many vote for the Conservative party because they're seen as the party of fiscal responsibility.
Either way as a mortgage holder who's probably going to default on their mortgage due to all of this I don't expect anyone to step in and help me =) This is my mistake, not the governments. And I'm just a pleb with a family, not a pension fund.
by yuvadam on 9/29/22, 9:58 AM
[1] - https://lookingglasseducation.com/whats-a-debt-spiral-and-is...
by severine on 9/29/22, 10:03 AM
by cbeach on 9/29/22, 9:33 AM
The pound dropped in value a few days ago, but the price has recovered since then.
The media chooses to focus on the drop rather than the recovery, because the drop coincided with a government announcement of some pro-growth economic policies that mainstream pundits disagree with.
If you speak to people in the U.K. many would agree that paying less tax is a positive thing, especially during a global cost of living crisis. But some people on the Left are angry that the wealthiest are also getting tax cuts.
What a lot of those people don’t realise is that the wealthiest 1% are paying 28% of income tax receipts - and this percentage has increased over the last decade.
In my opinion, I’m glad to see government reduce the tax burden on productive workers, as this stifled well-paying jobs, growth and investment.
I speak from personal experience. Due to the insidious tax policy of withdrawing the personal allowance when income reaches £100K, there is a marginal tax rate of over 60% at that income level. For that reason I chose to quit my job as a software team manager in an investment bank and instead went to work as a developer in a startup.
I decided there’s no point in working long hours in a responsible job helping other people advance their careers if I keep less than 40p of every pound I earn at that point. I may as well do less responsible work that I enjoy instead.