The near collapse of the UK financial system yesterday is one of the biggest economic stories of the year. It should be a hard lesson for politicians the world over about economic policymaking and the importance of independent central banks.
Liz Truss and Kwasi Kwarteng’s disastrous, debt-fueled £45 billion tax cuts package didn’t just send the pound plummeting — it also started an interest rate surge that sent every major UK financial institution to the verge of halting lending, which would have plunged the real-world UK economy into a major 2008-style crisis.
Only the intervention of the Bank of England (BOE) prevented that.
The government’s tax cut package sent British government bonds — gilts — soaring, panicking holders of longer-term bonds, and sent short-term UK interest rates past 5%. That promptly froze the UK home loan market and threatened to do the same to business lending.
In a statement on Wednesday morning as market trading opened, the Bank of England warned the crisis posed a “material risk to UK financial stability” and suspended its program to sell gilts bought in its support program during the pandemic. Instead, it announced that it would spend £5 billion pounds a day to buy long-dated (mostly 10-year) bonds over the next 13 days.
That staved off a growing liquidity crisis and saved bondholders facing margin calls on long-dated bonds. It had the added benefit of supporting the pound without putting up interest rates. The BOE had earlier tried to calm markets, unsuccessfully, with statements of its intent to control inflation.
At the heart of this is an unfunded package of tax cuts for high-income earners, revealed in a statement that Truss and Kwarteng refused to call a budget because that would have required independent forecasts of the impact of the cuts and other massive spending changes proposed.
The package is a triumph of US-style Laffer Curve idiotnomics, premised on the idea that cutting taxes for the rich will spur enough economic growth that overall tax revenue will make up for the cuts. It’s Truss and Kwarteng’s one big idea, one deeply appealing to the wealthy Tory Party members in provincial England who voted for Truss. As a number of critics have noted, you can only do this sort of thing in the United States, where the US dollar’s status as a global reserve makes it highly resistant to fiscal recklessness.
It’s also deeply dangerous to do it when inflation is hovering at 10% and the central bank is pumping up interest rates to get inflation down.
Even Boris Johnson, a man devoid of ideas and entirely uninterested in doing the hard work of leading his country, never caused a panic like Truss, who has been distancing herself from the Bank of England with the hope of blaming it if her package fails ahead of the next election due in 2024. Now it’s the Bank that has saved the UK economy from her recklessness.
Ironically, UK Treasury said it would fully indemnify the BOE operations, despite the cause of the crisis originating in the package Treasury put together for Kwarteng.
Following the intervention, the pound steadied and rose from less than $US1.06 to $UD1.088 at 7am Sydney time, and markets calmed down.
The crisis illustrates a key point seemingly forgotten by all those lining up to have a crack at the Reserve Bank here, as well as central bank critics around the world. Independent central banks are trusted far more than politicians and are the adults in the room that markets look to when politicians cause chaos — and it is their independence that supports that trust.
While Australia’s economy is far stronger than that of the UK’s, and our government is in a much better fiscal position than Truss and Kwarteng’s, we shouldn’t forget we’re handing ourselves a massive unfunded tax cut in 2024, mainly to high-income earners, at a time when the budget remains deep in deficit. The government, and Treasurer Jim Chalmers, have plenty of credibility with markets currently. The UK disaster is a demonstration of what happens when untrusted politicians with no credibility do stupid things.
Meanwhile, Truss’ rival in the contest for the prime ministership, former chancellor Rishi Sunak, sits on the backbench, safely distanced from the chaos. Not to mention a certain recently ousted former prime minister.
The Tories slowly but surely bringing the UK to its knees. Tories, Republicans and our Liberals govern for themselves and their business mates and stuff the rest of the peasants.
and stuff the rest of the pheasants
A pheasant, like other game birds, needs to be hung by head until the weight pulls the body from the semi rotten neck before being stuffed, cooked and eaten.
Yes, there’s nothing conservative about political conservatism. Conservative is just a euphemism for stupid, or perhaps, collective stupidity.
Inbreeding has got them to this point.
Disturbingly, one thinks that is the objective so then economies and societies can be rebuilt according to radical right libertarian socio-economic policies, but permanent (see USA).
Let’s hope Chalmers and Albanese learn from the UK’s stupidity and cancel the proposed 2024 tax cuts.
Let us let Albo and Chalmers “Do Spud slowly”, by 2024 when the tax is supposed to come into play the LNP will be pleading to have that tax cut cancelled.
Crashing an economy that is already suffering a 4% p.a. decline in GDP for ever because of Brexit….wilful self-harm.
That 4% is only this year, the economy is down 20% due to Brexit.
And then there is the Irish Border to sort out, Liz.
Bozo put it down the middle of the Irish sea – after excoriating the idea when the EU & PM May suggested it – and swore NOT to do so.
Perhaps Liz will truss it up and put it in the midAtlantic?
This is what happens when voters are distracted by the ridiculous made-up culture war crap. They end up voting against their own interests. It also demonstrates the importance of keeping fringe politicians away from the levers of power, because while their policies might have populist appeal to those on the reactionary right, the reality of the policies when implemented end up being a disaster.
Was this written by someone who doesn’t understand the huge economic benefit to producing renewable power and green hydrogen?
Or are you talking about our mostly racist Pauline.
Another reminder of the need for more sensible people in Parliament and that has absolutely nothing to do with gender or ethnic background. That requirement, however, does have a lot to do with the voters’ intelligence and level of knowledge of politics.
Glenn and Bernard have written a very good article.
Jim Chalmers was chief of staff to Wayne Swan when he was treasurer during the GFC. It probably gave Chalmers invaluable experience dealing with financial shocks emanating from overseas markets. In some ways he is about the best qualified person right now to be treasurer in Australia.
Contrast that with the time that Scott Morrison was treasurer… what was his experience as an economist or in setting fiscal policy? I think the answer lies somewhere between 0 and 1. He was very lucky during his time as treasurer to have a reasonably stable economy to manage. And even then he made some pretty basic errors.
Quite frankly Cooper, I am not interested in the slightest in supporting any politician who remains in thrall to the insidious disease of economic rationalism. And that most certainly includes those in the ALP (who you will recall introduced this egregious economic insanity into this country in the first place).
Chalmers is less likely to crash our economy.
Morrison has a degree in Economic Geography for UNSW and his honors was in how the exclusive brethren cult could market itself better.
He didn’t think that the country which owns one entire third of the Pacific was valuable.
Well qualified Chalmers may be, the ALP are still freaked out by the prospect of a scare campaign by the LNP, with petrol added to the blaze by Murdoch, about not delivering promised tax cuts.
Unless the Teals run a campaign to prevent the tax cuts (which is the most obvious point of policy I expect them to deviate from the Greens), it may take a UK crisis to embolden Chalmers enough to cancel this largesse.
The sound of a zombie apocalypse is scary
But a moron apocalypse is much worse
Did democracy really deliver uts the morons that were asked for
Voters’ intelligence and level of knowledge about politics??!! That is a lot to ask for any place but the UK? A country that rejected preferential voting because the maths was too hard. A stance lead by a former cricketer for England who spent most of his professional career in Australia? A country that has another former cricketer sitting in the House of Lords who can barely string 2 coherent sentences together? A country that worships a monarch regardless of value, work performance and background. A country that knows nothing of its blood-stained and disreputable past in Asia and Africa and other smaller places. Oh dear!
Time for Scotland to secede and Northern Ireland to join the Republic.
Welcome “Little Britain”
Bombs away!
And don’t forget Wales. Dump the Prince and his family. And then rejoin the EU with Scotland.