Ask HN: What Is Happening in the UK?

https://news.ycombinator.com/item?id=33018142

by m33k44 • 4 years ago

116 226 4 years ago

news.ycombinator.com

With recent news about market melt-down, I was wondering what really has happened? Anyone with the knowledge please ELI5?

pyb2• 4 years ago

In a few words, PM Truss's first economic measures indicate that she's ideologically-driven and has no idea what she's doing. Namely, cutting taxes for the rich in hope that maybe some economic boost will "trickle-down" to the middle class and the poor. This idea is utterly discredited in economic circles.

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.

ksaxena2• 4 years ago

The bigger problem is the energy-price guarantee that Truss has announced that will put a ceiling on fuel price for consumers, with the difference born by the UK treasury - estimated outflow is more than 100 Billion pounds. This outflow is planned to be funded by borrowing, which has resulted in a weaker pound.

Someone• 4 years ago

Adding nuance: it’s not that they put a price cap on energy prices (many countries in Europe do that), but the amount of money allocated to it.

Reading https://www.bruegel.org/dataset/national-policies-shield-con..., the UK allocates about double of what France, Italy and Germany allocate to it.

hcayless• 4 years ago

They really had no choice about that part. The spike (beyond their control) in energy prices was set to bankrupt hundreds or even thousands of small businesses and put many people in a situation of deciding between heat and food.

The tax breaks though, were totally an own goal.

afavour2• 4 years ago

I’m not sure that’s a bigger problem, it was announced some time ago without significant market movement. Seems the trigger is faith in new leadership or lack thereof.

tut-urut-utut2• 4 years ago

Well, Truss was not elected because of her economic (or any other) competence, but because of her hardliner course against Russia.

Rishi Sunak was a better choice in every category, but had two problems:

1. he is not "white"

2. he is not anti-Russian enough

EDIT: By "elected" I meant "elected by her own party".

marksbrown• 4 years ago

I won't deny the UK doesn't have issues with race but it is not the US. Here class politics matter far more. Electing a multimillionaire married to a billionaire was never going to end well electorally.

pyb2• 4 years ago

I think the reason Rishi didn't sway Conservative party members is mostly 1., But you're not supposed to say it out loud. Truss was very much a nonentity until last month

notahacker4• 4 years ago

She was mainly elected because of her promises to cut tax, versus Rishi's promises to stabilise things and cut services where necessary

The latter course of action wouldn't have been wildly popular with voters (even those outside the 100k party members that made the selection who are a lot more impressed by Thatcherite postures than the average person), but it wouldn't have sparked the present response from forex and financial markets.

defrost• 4 years ago

It'd be fairer to point out that neither Truss nor Sunak were "elected" (or not) in any normal democratic sense.

The former PM resigned due to scandal and Truss is a drop in replacement "elected" by a tiny tiny number of elites isolated from the public at large.

Brakenshire6• 4 years ago

Rishi Sunak was claiming to be resident in the US while Chancellor of the Exchequer, while his wife was claiming non dom status to avoid paying tax. He was also hated by the supporters of the previous PM because he wielded the knife.

Also, the most popular candidate with the Conservative membership was Kemi Badenoch, who is black, but far more radical than Rishi Sunak, who was forced to defend Treasury orthodoxy.

I’m not convinced it has much to do with race.

bjornsing4• 4 years ago

I think the old adage “correlation is not causation” applies somewhat. It’s probably true that the market got worried about the UKs ability to service its long term debt, but Truss’ announcement came in the middle of the worst bear market in bonds for well over a decade. Also, e.g. the Swedish crown (SEK) has lost about as much against the US dollar as the pound has, completely unrelated to Truss and her announcement.

rgblambda• 4 years ago

Is it not the case that while the Swedish Crown is not officially pegged to the Euro in the same way that the Danish Krone is, it's value is heavily influenced by the Euro? The Euro's decline in value is down to investors moving their money to safer shores in the anticipation of energy shortages in Europe in the coming months.

chimprich6• 4 years ago

Sorry, but that's nonsense. The market dropped spectacularly during the new chancellor's not-a-budget-honestly speech. You can't get a better smoking gun than that.

but Truss’ announcement came in the middle of the worst bear market in bonds for well over a decade

Yes, and she chose to do that. It was amazingly irresponsible. The market response was entirely predictable.

hgdfhgfdfds• 4 years ago

"This idea is utterly discredited in economic circles."

I'm an economist and this is wrong. I usually see this line on on Reddit and not from any journal.

bluehatbrit2• 4 years ago

If you're going to counter someone's point y claiming to be an expert, you really need to link to some credentials. If you're not going to do that then linking to some research disproving the parent comment would also be useful. Without any of that it's just an untrustworthy claim and doesn't add to the discussion in anyway.

colinmhayes5• 4 years ago

Here you go https://www.igmchicago.org/surveys/tax-reform-2/

gadders4• 4 years ago

I think the only person ideologically driven here is you.

agent008t2• 4 years ago

First of all, high income does not mean 'rich'. 45% tax bracket started at £150'000 income - that is not 'rich' in London.

Secondly, all else being equal, lower taxes certainly would attract talent and business to the UK and overall make people better off. As a simple example, let us consider an extreme case where the UK has a 20% flat tax while maintaining macro/political stability, and that rate is expected to persist. For starters, there will be a huge move in tech from SF and NY to the UK. It will become a very desirable destination for top talent; startups and unicorns will follow. With clever tax incentives, it would not be just London either, but cities all around the country. That influx of talent and capital would benefit the middle class and the poor too. The one bottleneck, as is usually the case, would be housing - if that is also resolved (say, making it really easy to build in/near currently depressing-looking cities), there could be a real boom to the UK economy.

As things are going now, this is unlikely to play out in the UK, unfortunately.

donpott2• 4 years ago

Making GBP 150,000 before tax in the year 2019-2020 would put a person in the 98th percentile of salaries in the UK. If that's not rich, I don't know what is, in London or anywhere.

Source: https://www.gov.uk/government/statistics/percentile-points-f...

cbeach8• 4 years ago

The pound is low against the dollar, as is the Euro low against the dollar.

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.

buf• 4 years ago

The pound was .87 ten days ago and it's .92 now, up from it's low of .93.

It doesn't appear recovered to me.

bigfudge8• 4 years ago

Plus, the real damage is on value of gilts. Sterling is a secondary concern (although obv also inflationary)

leg100• 4 years ago

The dollar was 87p ten days ago, it's 92p now.

It get you're quoting USDGBP but what you say doesn't make any sense to anyone not sitting at a forex desk.

pfortuny• 4 years ago

Wow, removing the personal allowance is bonkers and totally against the principle of equality. But, of course, “the rich”…

bscphil• 4 years ago

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.

This is an extremely funny takeaway in that anyone who doesn't agree with your ideological position is likely to see this as the tax working as intended.

cbeach8• 4 years ago

Oh yes, you're not wrong.

Many people on the left see tax as an appropriate punishment for wealth.

In their worldview, wealthy people are demonised and dehumanised. The left are convinced that wealthy people are parasitic on society.

This leftwing ideology seems peculiar to me, having seen the data on who's funding public services, and who's benefiting from public services.

Nursie4• 4 years ago

Wow, this might be the most ideologically driven take I've seen so far. Not even all of the Tory party are this extreme in their interpretation.

"policies that mainstream pundits disagree with"

That the Bank of England have had to scramble to compensate for by bringing back QE in a limited form, that previous governers of the BoE have spoken out against, that the IMF has spoken out against, that previous heads of the US treasury have spoken against, that conservative peers and MPs have spoken against, that the markets responded to by having a fire sale?

Those are a few mainstream pundits? LOL.

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

Very few of those people would be paying less tax under these plans, as the major reduction is for people earning over 150k per annum - and those are the people already best placed to weather the cost of living crisis.

It's not that the wealthiest are also getting tax cuts, it's that virtually nobody else is.

I'm a high earner and I like money, but this is some self-interested bull**** right here

cbeach8• 4 years ago

The BoE made another huge mistake by using QE during a period of temporary global inflation, and during a temporary blip in the value of the pound. QE is the worst possible strategy.

And the IMF has consistently got it wrong about the UK economy. In the past it has actually made public apologies for doing so (IMF head: "do I have to go on my knees?" regarding incorrect warnings on UK economy): https://www.telegraph.co.uk/news/politics/10884632/Do-I-have...

We have to be careful to avoid the Argument from Authority fallacy, using the IMF and BoE reaction to judge government policy. https://en.wikipedia.org/wiki/Argument_from_authority

It's not that the wealthiest are also getting tax cuts, it's that virtually nobody else is.

When the most productive members of society got landed with a 45% tax rate in 2013, it was higher than many G7 nations, and there's no evidence to suggest it actually increased revenue. Have you heard of the Laffer Curve?

greybox• 4 years ago

I don't want to get in to discussing the politics or ideology here, but.

I wouldn't say that it's just "some people on the left" - I dont want to place myself on either side of the fence but sky news are doing interviews with cross sections of Conservative / Labor / Swing voters and most of them think that this is Truss's fault.

You are correct that this has coincided with the dollar making gains against most other currencies, and the effects of the mini-budget may be difficult to dis-entangle from that, but from the people I've seen interviewed, most people agree that the mini-budget has at least made things worse for the pound. It's worth pointing out that the pound has fallen significantly against the euro too[0].

[0] - XE dotcom

ajsnigrutin• 4 years ago

Yep, same thing is happening in slovenia right now... our previous government did one good thing (in a bunch of other bad things), and that was to lower taxes on paychecks. The current (left-er) one is bringing out the tax reform to "tax the rich", where even people earning average wage (~2k eur gross, ~1300eur net) will get taxed more.

Brakenshire6• 4 years ago

I think that tax credit withdrawal still exists, so now the effective tax rate is 40% from £50k to £100k, then 60% from £100k to £125k, and 40% above that.

Also, despite 10% inflation they’ve frozen the tax bands, so all workers earning above about £12k will have more of their income pulled into higher tax bands.

So they’re left with that artificially high rate which blocks progression, and most workers up to about £150k will pay more.

fnimick3• 4 years ago

the wealthiest 1% are paying 28% of income tax receipts - and this percentage has increased over the last decade

Without any information on how wealth inequality has increased, and the 1% have more income and assets now than they did last decade, this is misleading at best. If the top 1% are paying more taxes but are also making more money, this hardly seems unfair.

cbeach8• 4 years ago

So you think 1% of people shouldering 28% of the cost of public services is fair?

steve_gh• 4 years ago

Quite frankly, you are hugely privileged to be earning at that level. The median average salary in the UK is just under £26k.

Also, when you are that income level, there are a number of tax benefits you can enjoy - for example the first £40k you put into your pension is before tax - so it effectively reduces your salary (for tax purposes) by £40k. SO if you are doing the sensible thing and putting money into a pension, the threshold you talk of is effectively at a £140k salary.

cbeach8• 4 years ago

Yes I do pay plenty into my pension.

It's not my "privilege" to earn at that level. I was born into an average economic background. I worked really hard at school and university, and then over a period of seventeen years, I worked really hard in responsible jobs.

If all people from average backgrounds took the attitude that only "privileged" people get good careers, then unfortunately it would be a self-fulfilling prophecy. Luckily there are plenty of aspirational people in the UK looking to better their family's situation by advancing their careers.

JonChesterfield3• 4 years ago

Seems potentially relevant that some pension companies were looking at defaulting from margin calls this week. I'm not totally confident that money put into pension schemes is going to be there later.

orlp• 4 years ago

Also, when you are that income level, there are a number of tax benefits you can enjoy - for example the first £40k you put into your pension is before tax - so it effectively reduces your salary (for tax purposes) by £40k.

It also reduces your actual salary by £40k, not just for tax purposes, if you'll never end up using your full pension. Either because you've died before doing so, or because the pension fund can't pay you out (fully) since it is increasingly underfunded due to a rapidly aging society.

Answer this honestly for yourself: if you are fairly young, say 25-35, what are the odds you'll see more money in your lifespan from £40k put into a pension now that may or may not be fully available after retirement, versus £40k minus tax invested into an index fund and accessible/reroutable whenever?

Nextgrid• 4 years ago

The problem I see is that these tax cuts only really help those who don't need the help, all while the lower classes still can't pay their energy bills/rent/food.

The issue is that most of the economy relies on people (including the lower classes) spending, which they aren't going to do if they already spent all their money on rent/bills. This in turn means businesses may go underwater if they aren't getting enough customers to stay afloat and operate profitably, leading to losses of jobs and less business for the companies that serve those businesses, and so on and so forth in a cascading failure. So even if you are selfish and say "fuck the poor", it's a bad idea because your ability to stay rich relies on there being "poor" people who spend their money at your establishment. Not to mention that with extreme poverty comes crime, something that ultimately costs all of us money.

It's like "tricke-down economics", except it trickles up and unlike the former, this one actually does happen for real and we're already seeing the effects of it.

I say this as someone who otherwise is in favour of tax cuts and sees taxation as theft, but that's a discussion for another day. But if you're going to cut taxes to help with cost of living and can't cut them all, then focus your efforts where it actually helps. The ones who will actually see a non-trivial increase in their income due to this cut are those who already didn't need any help.

bigfudge8• 4 years ago

Plus, even taking at face value the notion that tax cuts were to inject money into the economy and stimulate growth, giving money to poor people guarantees it’s spent in the economy immediately.

rymate1234• 4 years ago

Due to the insidious tax policy of withdrawing the personal allowance when income reaches £100K

The affect of removing that doesn't seem to be that major, with the figures [1] appearing to work out at almost 1.5% less tax for those on £100k, and a little over 2.5% less tax for those on £200k -- hardly a huge decrease in the tax burden for those people.

[1] https://blogsmedia.lse.ac.uk/blogs.dir/8/files/2022/09/28sep...

mattgperry• 4 years ago

Mainstream pundits like... Dan Hodges?

We're trying to boost the economy by cutting taxes on the group of people who are most likely just to stuff the extra money into investments rather than spending it? Great idea.

dan-robertson2• 4 years ago

I don’t understand your logic? It sounds like you’re saying you changed jobs for less money so that your marginal tax rate would be lower even though your net income would be lower. In theory you could also change jobs to something that pays £125k where your marginal tax rate would be back down to 40%, though obviously you’d need to find such a job. You specifically wrote ‘marginal’ so I don’t think you’re confused between marginal and effective tax rates so are you suggesting that the 60p rate did not provide sufficient incentives for you to try to get paid more? That would maybe make sense but I think it can also be useful to think of pay raises on a logarithmic scale rather than a linear one (as in an equal amount of raise-worthiness would be expected to lead to a proportionally larger raise in absolute terms if your starting pay is higher), which would mean an x% raise at a higher marginal tax rate may still be worth it if your starting pay is higher. But then another common model is log utility for money which cancels out that effect.

It’s fair enough if you want to work at the startup but this seems like a strange rationalisation. I agree that the 60% marginal rate from the personal allowance reduction is kinda silly.

bigfudge8• 4 years ago

In what circumstances the does UK have a 60% marginal tax rate. I think the op is confused.

JohnCClarke• 4 years ago

Truss is borrowing £45B to pay for tax cuts this year. But like you ask any addict: "What are you going to do next year?"

The trickle-down maths looks "optimistic". Cutting £45B means that the economy needs to grow by £112.5B for the top rate 40% tax rate take to come out even. That is GDP growth of 4.5%. I.e. far in excess of what the economy has been capable of ever since 1997.

Talking of further tax cuts just pushes the assumed GDP growth further into fantasy land.

chimprich6• 4 years ago

when income reaches £100K, there is a marginal tax rate of over 60% at that income level

Can't you just put that in your pension to avoid that effective 60% rate?

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 think the way the UK calculates tax at that level is a stupid way of setting it up, but "only" taking 40% of the 100k to 125k is hardly terrible. If you're in that range, you're incredibly well paid for the UK (or pretty much anywhere in the world).

I would personally like to pay more tax if it meant decent public services instead of people dying waiting for ambulances.

solumunus2• 4 years ago

Wow, what a silly comment. Enough people have already rebutted this nonsense so I don't need to, but it just shocks me to find such uninformed takes on a forum with these demographics.

Also, this isn't just the left, it's practically anyone with a brain. Any conservatives from David Cameron's administration (not far right ideologues) are horrified by this, as are most of the current MP's who overwhelmingly wanted Rishi Sunak, who is also horrified by this...

psd15• 4 years ago

Funny - I thought the Cameron government was extremely ideological. Osborne wasn't thick, he must have realised the damage that austerity would do in a recession. Debt was extremely manageable going into the 08 recession. Interest rates were nearly zero.

I always viewed it as a cynical way to weaken labour.

gerikson• 4 years ago

The government announced a combination of tax cuts and deficit spending, and the global bond market decided there's a large risk the UK won't be able to service the debt it will be incurring.

icare_1er2• 4 years ago

Genuine question: why are markets disapproving of the economics policy decided by a ... right-wing governement ?

I though markets reacted negatively to socialist governments getting into power, not the opposite.

Scarblac• 4 years ago

Markets value competence, I think.

smt88• 4 years ago

You're starting with an assumption that right-wing governments are good for economies. Let's ignore that dubious assumption and instead look at the actual policy.

Truss's administration is giving tax cuts to the wealthy and paying for it by borrowing. The markets know that trickle-down economics is nonsense and these tax cuts won't boost UK's economy enough to cover the enormous amount of debt required to pay for them.

icare_1er2• 4 years ago

"Good for economies" does not mean much, and that's what distinguishes the left and the right.

Usually, the right-wing, and the "markets", agree on what is good for the economy. It is quite unique to see the "markets" disagree so strongly with "the right".

And it is also worth noting that it is quite rare to see left people use the view of Wall Street as an argument ! I remember many cases in Europe where socialists governement almost used it as an electoral argument that they would ignore "the markets" (or rating agencies) and not dictated their policy by what they said

kypro4• 4 years ago

It's probably not this. Part of the issue here is that markets do believe this will boost demand in the UK economy. It's just that this isn't good right now with inflation so hot. If anything you want to be increasing tax to lower demand.

As an investor you always want your investments to yield more than the rate of inflation and when government policy increases inflationary pressures by fuelling growth the market will demand higher interest rates. Of course there is also uncertainty about how the government will pay for the debt which is increasing the risk premium.

It's just dumb fiscal policy to boost growth at a time when central bankers are trying to do the opposite. It would probably work great during a deflationary period. Its just that's not where we are right now.

bigfudge8• 4 years ago

The counter factual where a left wing government does something this stupid is hard to imagine because the press and markets normally go so apeshit at even minor transgressions of neo liberal orthodoxy that we never get that far.

weberer• 4 years ago

Its not hard to imagine. We've seen it just recently in Venezuela.

https://en.wikipedia.org/wiki/Crisis_in_Venezuela

SilverBirch2• 4 years ago

The markets want to know that the UK can pay off it's debt. The government announced a massive spending package along with massive cuts to tax revenue. As well as this, they did it without the normal independent analysis on the impact, and have signalled they don't think they need to worry about the UK balancing it's budget in the short term. So the markets don't think the UK will be able to pay off its debt because the government announced plans that will cause it not to be able to pay its debt. Simple as that.

Normally left wing governments are punished because they increase spending without increasing tax revenue - causing unsustainable debt. The UK has done the right wing equivalent - they decreased tax revenue without decreasing spending - causing unsustainable debt.

chimprich6• 4 years ago

Markets react badly to uncertainty. The incoming administration has announced huge tax cuts without explaining how they are going to pay for it.

Either there is no realistic plan or the ministers involved have been too incompetent to explain it. Neither explanation inspires confidence.

kypro4• 4 years ago

Markets don't care about politics, they care about risk and reward.

By fuelling growth in a period of high inflation with debt you basically add to the existing inflationary pressures and increase risk.

As an investor you want your investment to at least yield more than inflation so this is one reason why the market is demanding a higher interest rate (the market now excepts UK inflation could run hotter), but they're also worried about the risk of extra borrowing so are also demanding a higher risk premium because of the uncertainty of their investment.

Also, I'd argue this isn't really a "right-wing" fiscal policy. Cutting taxes might be "right-wing" but borrowing to do so certainly isn't something that's universally popular with those on the right. Most on the right probably want tax cuts to be funded by spending cuts.

yuvadam2• 4 years ago

Led by the US, the entire world is in a debt spiral, and just like many of the systems that sustain modern civilization, the global economy itself is in various stages of unraveling from its unsustainable path [1]

[1] https://lookingglasseducation.com/whats-a-debt-spiral-and-is...

a3w• 4 years ago

A little to coarse, since OP asked about the UK. But Obama already acknowledged that the US will never pay back all their debt, "even if they get 10% GDP increase per year for every single year" if I am not mistaken about that non-verbatim quote.

ceejayoz8• 4 years ago

Not paying off all the debt and defaulting on debt are vastly different things.

yuvadam2• 4 years ago

That quote doesn't surprise me, politicians are stuck between a rock and a hard place without any real options to solve systemic issues. Just like with climate collapse, the solutions that tackle the problems at their core require what is effectively political suicide.

stephen_g2• 4 years ago

Monetarily sovereign countries like the US, UK, Australia, Japan etc. (but not Euro using countries because they can’t control their own currency) don’t really have to. They can just keep rolling things over for as long as they want. If private markets don’t want to buy bonds (they will tend to though because it’s basically risk free), the central bank can.

It’s not the money that’s the issue - that’s an abstract, invented thing. The limits are inflation, natural resources and available labour.

bitshiftfaced• 4 years ago

Led by the US in nominal, absolute terms

thewarrior2• 4 years ago

The UK imports large amounts of energy and other things essential to its prosperity. The UK has a current account deficit which means it does not have enough of the dollar to cover for its imports.

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.

tomxor• 4 years ago

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.

I'm pretty sure i'm being naive here but... why?

House ownership has become a huge problem for recent generations in the UK, I still haven't engaged with the market because it's so hard to get a foot in the door unless you have masses of disposable income. Popping the bubble would help a lot of people in the UK to begin a more healthy long term financial life (i.e compared to pouring a huge chunk of your income into the pockets of landlords instead of a house you end up owning).

Is it that at a market scale there would be repercussions outweighing the obvious benefits to citizens? Or are they just protecting the rich who want to maintain the value of their "assets".

thewarrior2• 4 years ago

A housing crash would be destabilizing in its own right and it would hurt the rich Tories. So there’s no way they are letting it happen. They will fight it tooth and nail.

truckerbill• 4 years ago

All the housing stock will be snapped up by Blackstone and the like...

solumunus2• 4 years ago

It's a huge problem for poor people. Liz Truss and Kwasi's friends hold most of their wealth in property and those are the people that matter to these soulless lizards.

UglyToad• 4 years ago

Not so much "the rich" as the vast majority of voters and a large section of the population. From "Rethinking the economics of land and housing":

One important effect has been on the interests and aspirations of the electorate: the last thirty years have witnessed an expansion in the number of voters who have a vested interest in the buoyancy of the housing market, and a marked decline in the constituency of voters with an interest in social housing
This has triggered a shift in political attitudes on issues of housing and resulted in a much greater focus on meeting homeowners’ aspirations. Overall these factors represent a profound shift in the way that land and property has been perceived in British society.
Whereas 100 years ago houses were mostly regarded as simply somewhere to live, today homeownership is promoted as an investment opportunity which offers long-term financial security in the face of stagnating wages, dwindling pensions and reduced state welfare provision. To politicians and much of the general public alike, houses are no longer perceived as universal consumption goods but rather as vehicles for accumulating wealth.
Homeownership has become perceived by many as ‘the essential step to obtain membership of an expanding middle class for whom housing equity was pivotal in a broader lifestyle of credit based and housing equity fuelled consumption’ (Forrest et al., 1999). [...] underpinning this has been a deregulation and liberalisation of the financial sector and a rapid increase in income and wealth inequalities.
This marks the final major shift in land’s economic significance, as high levels of owner-occupation, a deregulated housing finance system and growing inequalities have combined to create a system of ‘residential capitalism’ (Schwartz and Seabrooke, 2008). In turn, the political dominance of homeowners – both in national elections and in local planning decisions – has ensured that their interests have been protected and subsidised by government policy (Keohane and Broughton, 2013).

For the avoidance of doubt, I don't think this is a desirable or sustainable situation. I just thought it was helpful to expand on the contributing factors.

zarzavat• 4 years ago

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.

The government doesn’t get to decide this. Interest rates are set by the Bank of England and will rise as a result of the government’s decisions. So it’s more accurate to say that the government doesn’t care about popping the real estate bubble or is delusional about the effects of their policies.

gadders4• 4 years ago

High energy prices due to Ukraine and Net Zero = Good

High energy prices due to pound weakening against dollar = Bad

severine• 4 years ago

Truss and Kwarteng are really fast! As emptywheel said, usually it takes conservatives a matter of years to create the financial crisis they must then intervene to fix.

imdsm4• 4 years ago

Sorry but this isn't the place for politics. HN is our last refuge from the shitstorm of political unrest on every other site. Reddit, Twitter, and Facebook are available though.

sofixa• 4 years ago

Criticising politicians under an Ask HN on a topic for which said politicians are directly responsible seems entirely reasonable to me.

hunglee24• 4 years ago

In simple terms, the Bank of England and UK Gov are pursuing conflicting economic policies, BoE trying to take money out of circulation through hiking up interest rates, whilst UK Gov is putting money into circulation by proposing massive debt funded tax cuts.

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.

ksaxena2• 4 years ago

Between the tax cuts and the energy-price guarantee, the bigger problem is the energy-price guarantee that has been announced by the government. It will put a cap on fuel prices for consumers and the resulting deficit is planned to be funded by the treasury. The deficit is estimated to be more than 100 Billion pounds, and it is planned to be funded by government borrowing. This has resulted in a weaker pound.

hunglee24• 4 years ago

I believe it is up to £150 Billion, and yes does indeed contribute to the weakening of the pound. However, orthogonal factors like Fed Reserve interest rate hike has larger effect, as great deal of debt is denominated in USD

chimprich6• 4 years ago

The deficit is estimated to be more than 100 Billion pounds

If any of our US friends were wondering what that is in your currency, it's about 100 billion dollars (following our new PM's economic "experiments").

Brakenshire6• 4 years ago

Yes, at a moment of inflation, they announce significant tax cuts which will have a big inflationary impact. The Bank of England was already behind on interest rate rises, and now the government is relying on them to not only counter global trends (high rates in the US causing devaluations basically everywhere), and also the inflationary effect of energy cost increases, but also extra inflationary tax cuts. That will force rates high (apparently the market is pricing in an increase to 5%), which will then cause big reductions in housing, and negative equity.

The thing I am confused about is why this happened at the announcement. The big measures had already been announced, an energy price cap (£60bn or more depending on wholesale gas costs), and reversal of planned tax increases in National Insurance and Corporation tax (about £40bn). The additional unannounced tax cuts were small (for instance the cut in top rate tax was £2bn). So it seems that most of the drop should have happened before.

Apparently the PM wanted the announcement to feel radical to distance her from the previous government, so maybe the markets were responding to the feeling of the announcement, and the implication of future radical ideological action, as much as the numbers.

afavour2• 4 years ago

Apparently the PM wanted the announcement to feel radical to distance her from the previous government, so maybe the markets were responding to the feeling of the announcement

My understand is that it’s exactly this. So much of the markets comes down to vaguely defined “confidence” and the new leadership simply isn’t inspiring faith from those in charge.

bluehatbrit2• 4 years ago

The thing I am confused about is why this happened at the announcement. The big measures had already been announced [...]

I'm far from an expert, but to be totally honest I think most people didn't really expect it to happen this way. The media were all talking about how it's not possible and no one knew where the funding would come from. Everyone was mostly expecting it to not happen to be quite different and more complex.

It turns out we overestimated both the PM and the Chancellor.

rvieira2• 4 years ago

(Not an economist by any measure) Can you explain "tax cuts which will have a big inflationary impact". The 20% bracket went down to 19%. The 45% bracket disappeared (now included in the 40%) which is only for £150k+ earners, which is a tiny minority in the UK. I don't think the actual numbers move inflation.

Isn't it more the conflicting policies (BoE and gov) in theory and the perception of them not being in the same page?

stephen_g2• 4 years ago

The crashing of the pound doesn’t make the tax cut more expensive - the UK doesn’t borrow in foreign currencies. They only issue bonds in pound sterling, and the tax cut is in their own currency, so it doesn’t really change things.

Not to say the tax cut is not a terrible idea - it’s absolute stupidity.

SargeDebian• 4 years ago

That is assuming lenders don’t want compensation for investing in a devaluating currency.

alkonaut2• 4 years ago

Isn’t the simple option to simply reverse policies and do whatever returns confidence? No debt funded tax cuts, reduce excessive energy subsidies and so on?

Sure it might be disastrous for Truss, or Government, or The Conservative party. But for the UK as a whole it must be the reasonable way out?

hunglee24• 4 years ago

this is probably what is going to happen - actually the least worst option. However, such a reversal will not fully restore confidence as any U-turn will not come at political cost to Truss / Kwarteng but also to UK Gov / Conservative party leadership as a whole - it would be admitting that they don't know what they are doing. There will be an economic price for that also

rcarr6• 4 years ago

This is what any previous government would have done despite the embarrassment. However, in the same way our previous PM idolised Churchill, our current one idolises Thatcher who was famous for her “this lady’s not for turning” speech. This means that Liz Truss (our current PM) is highly unlikely to reverse course because in her head she’s having her “Thatcher moment” and must stay true to course in the face of any and all naysayers. This is despite the two situations being wildly different. Rather than admit any fault, the government are now trying to gaslight the entire country into believing that the currency crisis wasn’t caused by their announcement last week but by the energy crisis and covid. The whole thing is an absolute train wreck.

penguin_booze• 4 years ago

reverse policies

Have you ever seen authority figures backing off? When questioned or face backlash, they only double down. In fact, that's what happened - the official word is "this is the right way", and "the government is not responsible for market movements", "it sends the wrong message to tax windfall profits", "The poor can't pay bills? That's fine, we'll cut tax for the rich - that'll fix it".

#KamiKwasi, as Twitter called it, will continue.

MattPalmer10863• 4 years ago

They also avoided costing any of it, and had no analysis by the Office of Budget Responsibility. Since they called it a "fiscal event" rather than a budget.

This avoidance of accountability is a repeated pattern in British politics recently. Turns out you can bend our political system that way, but the global markets really don't appreciate that behaviour.

One economist said that Britain is now paying the Moron Risk Premium.

hunglee24• 4 years ago

yes, incredible. Now UK is waiting for OBR to conduct this analysis in November, not only classic cart-before-horse but punitively long period of uncertainty which will be sure to bleed what remaining confidence there is the UK economy

gadders4• 4 years ago

Tax cuts aren't debt funded. Tax cuts are free. The (arguably excessive) government spending is what is debt funded.

benj111• 4 years ago

Potato potahto.

Money comes in money goes out, the difference is made up with debt. Tweaking either the income or the outgoing knobs impacts the debt required. So a tax cut requires extra debt to make up the difference.

anm89• 4 years ago

This seems pretty disingenuous to me. They aren't just choosing to pursue conflicting policy. The government acted first and FORCED the BOE to intervene to avert a crisis.

Here's potentially a better description: The new government came in and announced a series of policies that made it immediately clear to markets that inflation was not being taken seriously in the UK. This lead to a drastic, and I mean historically drastic, sell off on the long end of their bond market. Basically all capital markets in the UK were on the brink of freezing and probably shortly thereafter this would have become systemic.

This would have basically set the timer started on the UK being maybe a few weeks off from a humanitarian crisis. (if you think this is hyperbole understand that the entire energy storage capacity of UK is about 1% of their yearly use meaning capital financed energy flows are constantly necessary to keep the system running, the food situation is not that severe but still requires flows)

After all of this occurred, the BOE came in did the thing that they had zero other choice but to do which was to inject liquidity back into that segment of the bond market. I think they would be the first to tell you that this policy is a disaster. They had absolutely no choice.

tmaly2• 4 years ago

What about the British Pension funds speculating the derivatives?

https://www.cnbc.com/2022/09/30/ron-insana-something-big-cou...

JonChesterfield3• 4 years ago

Our government announced new economic policies that have been judged extremely harshly by everyone. The public perception of them is also severely negative which increases the risk of the alternative party gaining control next time around.

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.

doublesocket• 4 years ago

Hopefully the people who chose Truss have made enough of a loss this week to reconsider their priorities.

Except Kwarteng's former boss Crispin Odey is making a killing shorting the pound. https://www.independent.co.uk/news/uk/politics/tory-donor-pr...

JonChesterfield3• 4 years ago

Well, yes, there's always the option of bringing a case for insider trading (or possibly treason) for things like that.

It's hard to make more from shorting the pound than the loss across your entire estate from sterling crashing though, unless it's now common for wealthy conservatives to hold most of their assets in dollars instead of UK real estate.

gadders4• 4 years ago

Good to see the conspiracy theories starting already.

caoilte5• 4 years ago

un-costed tax cuts and an open ended promise to pay for the spike in energy prices spooked investors and caused a run on the pound and (worse) a collapse in the value of UK debt. This threatened to cause a run similar to the 2008 US mortgage backed securities crash because a lot of investors (including many if not most UK pension funds) used their UK debt as collatoral for more loans. If the price falls to far too fast they have to sell their UK debt at distressed prices to meet margin calls and this drives the price down further. The Bank of England has stepped in to prop up the market by printing more money (which means more inflation).

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.

viraptor• 4 years ago

If you're ok with a video format, I'd really recommend the TLDR News UK. (https://www.youtube.com/c/TLDRNews) It's fairly accessible but not dumbed down. The last 4 or so videos relate to the problems since Truss. If you want to dig deeper they also have daily summaries and podcasts diving deeper into specific issues.

andy_ppp• 4 years ago

I thought this was quite a good summary from Jonathan Pie, even if it’s meant to be comedy… https://youtu.be/w-V5FVludFk

sixhobbits• 4 years ago

If you look at the graphs for GBPUSD and EURUSD on year timeframes they are very similar. I am not an economist but to me it seems like the various Europe crises around energy, war, covid etc have the main effect and the media is just focusing on UK specific politics and monetary policy because it changed recently and gets clicks.

SilverBirch2• 4 years ago

The real story here isn't just currency though, it's government debt, and UK 10 year gilt yields have double in the last 2 months and are now being stabilized by the Bank of England.

kepler1• 4 years ago

In the short-term, the factors well described by others above.

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?

rwmj2• 4 years ago

Combined with an unfair voting system that means the majority who support several progressive parties cannot outvote a unified minority. The US has the same voting system problem.

emptyfile• 4 years ago

Having austerity during low rates and fiscal expansion during high rates is a pretty bad idea.

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.

*https://en.wikipedia.org/wiki/Britannia_Unchained

scrlk• 4 years ago

The Bank of England's announcement that they will restart QE (a.k.a. money printer goes brrr) on a "temporary basis" was driven off the back of UK pension funds facing massive margin calls due to the spike in gilt yields.

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."

candiodari• 4 years ago

A cynic would say this is by design. The government created those funds to avoid paying pensions, and spend the money themselves (pension funds are designed to let the government spend all the money they collect, increasing government debt. They do not have the choice what to invest in), and this is merely a continuation of that policy. That these funds are going to crash is a certainty, they're designed to delay it as much as possible. They have now achieved that.

When it became clear that having enormous debt inevitably causes instability when people doubt the government's ability to pay this back, pension funds became responsible for not just funding the government, but also guaranteeing the ability of the government to loan more money. This requires leveraging their investment, and THAT is what's causing the crash here, that leverage. They've effectively guaranteed N times the government_debt, and that N is what became "big". That guarantee doesn't help pension funds, it keeps government debt payments low. The market is saying they don't want to lend to this government, and the government (not the PM, the rules for pension funds that already exist) is trying to force the availability of cheap debt. Of course, not using their own money or budget, but using pension money of ordinary people. This became out to be so incredibly expensive that even pension funds were in danger of not being able to pay for it, so the BoE lowered government funding costs using money printing, against their policy.

Pensions the way they were introduced after WW2 in the majority of places are utterly unsustainable, and the UK is no exception. If you calculate what a person needs to have an acceptable pension at the yields we've seen, you get to about a million pounds per person (2% drawdown, 2% investment yield, for 30 years, giving a person 25k GBP per year after tax = roughly a million. And that's generous, assuming interest rates go up and stay up, on average, above 4% without dropping average stock market returns below 4%, and with dropping inflation to ZERO 0%, because at 2% over 30 years, it's of course more, if you want the standard "parity" investment to work out). Pension funds actually have about 50k per person, not even 2 years worth of pension.

Pension funds are going to crash, obviously, and what Truss and Kwarteng are trying isn't the cause of that. In fact, huge inflation ought to delay the point these funds will crash. It's a matter of when, not if, and not a question "who is in office when it happens". I actually think their odds of preventing a pension fund collapse during their term are pretty good.

The government is back to the 1920s: they've found a way to force the government budget to be money printed by threatening pensioners livelihoods, and thereby can now effectively spend infinite money. This will of course cause massive inflation, but it will as was demonstrated, save pension funds. It won't, of course, help pensioners. They'll lose big in effective purchasing power. And that is exactly the point of this policy.

csdvrx• 4 years ago

Very interesting comment, with mathematical analysis + simple explanation, ty!

rcarr6• 4 years ago

It’ll also inflate away that pesky 2 trillion student loan debt that wasn’t ever going to be repaid, funny that!

tmaly2• 4 years ago

What is the exact relationship between the amount of money introduced into the economy and the decrease in purchasing power?

I have yet to see an exact model that shows this. Obviously it could not be one to one because of residential/commercial credit based on a fractional reserve system.

yieldcrv• 4 years ago

In addition to what others said about the Bank of England monetary policy being in mismatch with the UK Goverment's fiscal policy, there was an issue with pension funds.

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).

psd15• 4 years ago

"gilts". It is not an acronym.

fffobar• 4 years ago

Where is that market meltdown? The FTSE 100 is down a whopping 1% today, and down 3% over the last 5 days. Looks absolutely normal to me.

EliRivers• 4 years ago

The FTSE100 does well when the pound drops against the dollar, as about 70% of revenues generated by FTSE100 companies comes from outside the UK. When the pound drops, their revenues (measured in pounds, at least) go up.

The FTSE250 is down 7% over 5 days.

chimprich6• 4 years ago

The FTSE 100 is mainly made up of international companies, so is somewhat insulated from the UK economy. It's still taking a hit though.

Al-Khwarizmi2• 4 years ago

Related question: in what metrics is such a market meltdown visible? The FTSE 100 is down like 4% or so in the last two days, and the pound lost 2% to the euro, those don't look like scary figures to me compared to past volatility. I guess I'm looking at the wrong metrics, so what are the relevant ones?

tialaramex• 4 years ago

Gilt yields. Truss' government will need to borrow lots of money since it intends to "grow" the economy by just giving the wealthy more money [a plan the market knows doesn't work]. This is done by auctioning bonds, which then trade on a secondary market. The UK's government bonds were once all issued as physical objects literally gilded with metal edges, hence "gilts".

In effect what is on offer in these auctions is a government promise to pay a certain amount of money at a set time in the future. Bidders say how much money they will pay now for that promise. For example maybe the government wants to pay £105 in 2050, and the auction just settled at £86 and I was a bidder, I pay £86 now, and I get a promise to pay £105 in 2050. The governments gets £86 now which it can spend, but needs to find £105 to pay me in 2050 (Hint: It will just issue more gilts).

Gilts are a bit more complicated because they have index linking and there's a whole coupon mechanism so you get a little bit of the money back periodically, but this gets the basic idea across.

The exchange rate stuff has a more immediate impact because it causes import prices to jump, but the gilt problem is actually what means you shouldn't ever do this. It's like using credit card debt to finance a fun ski holiday versus to buy a car so you can drive to work. One of these things is reasonable, albeit not ideal, the other is just throwing away money. Unfortunately it isn't Liz's money, it's the nation's money, increasingly it's the money of those least able to afford it.

neximo64• 4 years ago

You never go into expansionary fiscal policy during periods of inflation. The UK did that, it wasn't so much about the tax cuts, it was that they weren't matched with spending cuts.

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.

r721• 4 years ago

The Economist story:

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)

BerislavLopac• 4 years ago

What is really happening is that a group of disaster capitalists, including various "think tanks" and hedge funds, have direct control over the PM and the government, which is putting in place policies that directly benefit them. They have made great profits by extracting the public money in various ways, as well as shorting the sterling; there is no "ideology" involved, it's simply pure short-term greed.

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.

roenxi8• 4 years ago

This question is ill-posed to the point where it doesn't have an answer. Every economic crisis people carefully step around the fact that phrases like 'economic crisis' or 'market melt down' don't mean anything and most of the people using the terms don't seem to think too hard about what the problem is.

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.

kypro4• 4 years ago

If a government runs a fiscal deficit then to balance their books they need to borrow additional funds from the market.

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.

kypro4• 4 years ago

Also I suppose to add a little more depth to this explanation a lot of this is related to actions coming from the US central bank.

As the Fed raises rates in the US it makes the dollar a more attractive place to put money. This devalues other currencies against the dollar.

Because the dollar is the reserve currency a lot of stuff countries like the UK imports is denominated in dollars (oil, food, etc). This means the US actually increases inflation pressures for other countries when they raise their domestic interest rates.

This forces other central banks to raise interest rates in line with the US simply to protect their currencies from the inflationary effects of currency devaluation.

Unfortunately right now Europe can't really afford to do this with an ongoing energy crisis, but we have no choice. The US is literally whacking their allies around the head with the US dollar.

But then from the US perspective what choice do they have? The Fed already has little credibility and to allow inflation to run hot in the US to protect Europe from currency devaluation would be equally risky and unpopular.

We're in very tricky times. We've kicked the can down the road for so long that it's now catching up. We no longer have any good options left. It's all just trade-offs from here.

Many including myself did try to warn this was always the risk of such a reckless response to Covid, but I suppose it's too late for that now.

logicalmonster• 4 years ago

Many including myself did try to warn this was always the risk of such a reckless response to Covid, but I suppose it's too late for that now.

It's still hard to fully discuss the overreaction to Covid in many forums without getting shouted down for wanting to kill Grandma, but there are people out there who don't seem to fully grasp that actions taken to try and solve problems can have drastically negative consequences. You can't just spend money you don't have indefinitely without paying the piper and screwing yourself down the road.

Personally, I fear that the emotional reaction to Russia/Ukraine is turning the same way, perhaps with far more dangerous long-term consequences.

bvoq• 4 years ago

What’s really happening: Liz announced to remove the 45% tax bracket for people who earn more than 150K£ a year. This means that roughly 50 billion £ will be missing from the government. That money will have to be printed, decreasing the value of the pound. More pounds -> Less value.

switch0072• 4 years ago

The removal of the 45% tax bracket isn't the sole contributor to that £45bn/year figure, it's all the tax changes (a funny numerical coincidence though!)

"...due to the almost £45 billion a year of tax cuts announced by the Chancellor today" https://ifs.org.uk/articles/mini-budget-response

guilhas• 4 years ago

The banks/markets are in failing mode since 2012, with constant bailing out, quantitative easing. In USA, UE, UK... Causing banks addiction, and inflation

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

rcarr6• 4 years ago

We are living in a zombie economy, the living are sacrificed to feed the dead. Bad companies, bad banks and, ultimately, bad ideas need to be allowed to die and successful ones allowed to take their place. You can’t fight the circle of life!

https://en.m.wikipedia.org/wiki/Zombie_bank

switch0072• 4 years ago

The Government made it to obvious to anyone who can get out, to get out.

They're quite obviously doing a smash-and-grab on the country for their remaining time in power.

markus_zhang• 4 years ago

Public lost confidence. UK Bond got trashed, more bond needed to be sold because of this (most liquid) and good stocks followed. BoE stepped in to save everyone.

account-5• 4 years ago

In short:

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!!"

Ask HN: What Is Happening in the UK?

Related Stories