Liz Truss, who became British Prime Minister less than a month ago, may have set a political speed record.
It is certainly not the first leader who has been forced to give up a U-turn politics in the face of adverse market reactions.
But announce an economic program and then abandon your central axis only 10 days then it is something special.
And I think those of us on the center can be forgiven for feeling a little schadenfreude.
Conservatives constantly warn that progressive policies will be punished by “bond vigilantes” who, they say, will raise interest rates at the prospect of increased government spending.
Such warnings usually turn out to be wrong.
In Great Britain, however, the guardians of the bond have appeared:
Interest rates they shot after the Truss government announced its economic plans.
But the market wasn’t reacting to overspending; I was reacting irresponsible tax cuts.
That said, the simple story: that Truss proposed policies that the deficit would increase budget and fuel inflation, and the markets reacted by raising interest rates and lowering the pound; he misses a lot of what really happened.
This was both more than less a matter of dollars and cents (or, I suppose, pounds and pence).
Instead, it was largely a government that wasted their intellectual and moral credibility.
How big was the tax cut proposed by Truss?
She and her officials announced their policy with no budget score, which contributed to a loss of market confidence.
However, there are independent estimates; for example, the Resolution Foundation, a British think tank, has estimated Truss’s tax cuts at 146 billion pounds in the next five years, which would represent approximately 1% of the gross domestic product screened in the same period.
It’s not trivial, but it’s not huge either.
And the particular tax cut that has just been abandoned, a reduction in the maximum tax rate, has been Only a part of that total.
So why has the market reaction been so fierce?
Partly because Truss e Kwasi Kwarteng, the finance minister justified their moves with the much discredited claim that lowering higher tax rates would provide a huge boost to economic growth.
This raised questions about your competition and, in fact, its link with reality; It never goes well when big bank economists declare that the ruling party of a country has become an apocalyptic cult.
Questions about the Truss trial were reinforced by the ignorance of his time.
Right now, European municipalities, including the British, are facing difficult times, largely as an indirect consequence of the Russian invasion of Ukraine.
The Ukrainians, incredibly, seem to be winning the war; It does not detract from its value to say that Western weapons have played a significant role in its success.
Therefore, Vladimir Putin tried to put pressure on the West by cutting off the flow of natural gas.
This is a huge negative economic shock for Europe, probably bigger than the oil shocks of the 1970s.
Governments are trying to limit the pain caused by rising energy bills.
But all of Europe, again, including Britain, is facing something akin to the economic equivalent of war.
The US is much less affected, although natural gas prices have risen here as well.
And as in times of war, government policies must promote the feeling that people they are in this together.
At that point, the tax cut for the rich, who are less affected by higher energy prices than people with lower incomes, sends the message that only small people will have a hard time.
This message andIt is particularly toxic as the British public is in turmoil over cuts in public services, particularly in medical care, and he wants taxes to rise, not fall, to pay more.
And it is difficult to govern effectively when you have angered most of your nation.
There was another factor in the market turmoil created by Truss’s proposals, which amplified the effects of the loss of credibility.
It turns out that British pension funds, which own many British government bonds, have tried to reduce risk with complex financing strategies that require them to accumulate extra liquidity when interest rates rise and bond prices fall.
As interest rates rose, pension funds were unable to raise enough liquidity at short notice, and this threatened to force massive bond sales that would push rates even higher.
Bank of England emergency intervention limited the damage but the episode added even more anxiety.
And yes, with interest rates on the rise almost everywhere, one wonders if there are more financial crises waiting to happen.
The collapse of British stocks was probably exceptional, but no one remembers it 2008 You can avoid feeling a little anxiety.
But back to the Truss debacle.
As I said, the wild reaction market to the plans of the new prime minister was more than money.
In difficult times, leaders must be perceived as realistic and fair.
What Britain got instead was a leader who seems to be living in a fantasy world and is oblivious to concerns about social solidarity.
And it will be very difficult compensate for the damage which he did in a few days.
c.2022 The New York Times Company
Source: Clarin
