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Ask HN: What Is Happening in the UK?

116 points by m33k44 4y ago

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

gerikson 4y 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_1er 4y 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 4y ago
  Markets value competence, I think.
- smt88 4y 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_1er 4y 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
    - mathieuh 4y ago
      "I will never be ashamed of quoting a bad author as long as the line is good" – Seneca
    - caoilte 4y ago
      That sort of fantastical thinking is quite rare outside of fringe parties (left and right). The UK Labour party's spending plans in 2019 were fully costed exactly in order not to spook the markets. (Naturally that's not how the media portrayed the situation of course.) Ignoring the markets hasn't been possible since Nixon ended the gold peg.
  - kypro 4y 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.
- bigfudge 4y 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 4y ago
    Its not hard to imagine. We've seen it just recently in Venezuela. https://en.wikipedia.org/wiki/Crisis_in_Venezuela https://en.wikipedia.org/wiki/Crisis_in_Venezuela
- SilverBirch 4y 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.
- chimprich 4y 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.
- kypro 4y 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.
pyb 4y 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.
- ksaxena 4y 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.
  - afavour 4y 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.
  - Someone 4y 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-consumers-rising-energy-prices https://www.bruegel.org/dataset/national-policies-shield-con..., the UK allocates about double of what France, Italy and Germany allocate to it.
    - notahacker 4y ago
      Further nuance: the UK government also ruled out trying to regain some of that expenditure on energy subsidies by increasing taxes on relevant energy company profits. And whilst the fiscal impact of the top rate tax cut (or indeed not introducing energy company windfall taxes) may not have been that huge relative to the energy subsidy, the signal sent by the the triumphal announcements that borrowing to cut taxes would solve problems was that the government wasn't just making emergency funds available to resolve a crisis, but has ceased to care about balancing their budget or inflation and doesn't really know what it's doing.
cbeach 4y 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 4y 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.
  - bigfudge 4y ago
    Plus, the real damage is on value of gilts. Sterling is a secondary concern (although obv also inflationary)
  - leg100 4y 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 4y ago
andy_ppp 4y 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 https://youtu.be/w-V5FVludFk
yuvadam 4y 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-the-us-already-in-one/ https://lookingglasseducation.com/whats-a-debt-spiral-and-is...
- a3w 4y 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.
  - ceejayoz 4y ago
    Not paying off all the debt and defaulting on debt are vastly different things.
    - roenxi 4y ago
      Are you potentially not a creditor? I think the term here is 'distinction without a difference'. If you lend the US enough money for a sandwich, you should expect not to get a sandwichworth of money back. What you call that legally is not that interesting, I suspect, to the people were lending the money.
      - ceejayoz 4y ago
        The creditors all get paid. The US has always made its debt payments. New loans get taken out while that happens. Non-$0 debt load, but no defaults. The only time the US ever paid off “all its debt” was during 1835-1836. One year out of more than 200.
        roenxi 4y ago
        It doesn't matter what happened to creditors centuries ago. As it stands right now it is inconceivable that the US could or will pay off all its present and future creditors in real terms. Someone has lost a lot of money (presumably China and Japan). How could the US pay them back without resorting to fantasy? The debts are too high and the US economy is not big enough for any strategy to be politically feasible. Even coming up with a serious scenario where the US tries to pay down its debts is hard. It is likely that they are going to keep running up debts until they can't pay the interest any more, then default. The best outcome the US can achieve is semantic games where they pretend that giving people back less than was borrowed is somehow reasonable.
thewarrior 4y 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 4y 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".
  - thewarrior 4y 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 4y ago
    All the housing stock will be snapped up by Blackstone and the like...
severine 4y 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.
- imdsm 4y 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 4y ago
    Criticising politicians under an Ask HN on a topic for which said politicians are directly responsible seems entirely reasonable to me.
hunglee2 4y 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.
- ksaxena 4y 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.
  - hunglee2 4y 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
  - chimprich 4y 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").
    - rcarr 4y ago
      You stole my joke from yesterday! https://news.ycombinator.com/item?id=33009959 https://news.ycombinator.com/item?id=33009959
- 4y ago
JonChesterfield 4y 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 4y 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-profit-pound-sterling-b2176258.html?amp https://www.independent.co.uk/news/uk/politics/tory-donor-pr...
  - gadders 4y ago
    Good to see the conspiracy theories starting already.
  - JonChesterfield 4y 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.
caoilte 4y 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 4y ago
If you're ok with a video format, I'd really recommend the TLDR News UK. (https://www.youtube.com/c/TLDRNews 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.
sixhobbits 4y 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.
- SilverBirch 4y 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 4y 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?
- rwmj 4y 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.
deleted 4y ago
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emptyfile 4y 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 https://en.wikipedia.org/wiki/Britannia_Unchained
scrlk 4y 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-f48e30f8603c https://www.ft.com/content/f4a728a5-0179-48bd-b292-f48e30f86... (archive link: https://archive.ph/vRrGk 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 4y 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.
yieldcrv 4y 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).
- psd1 4y ago
  "gilts". It is not an acronym.
fffobar 4y 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 4y 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.
  - deleted 4y ago
    [deleted]
- chimprich 4y 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-Khwarizmi 4y 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 4y 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 4y 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 4y 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-a-country https://www.economist.com/leaders/2022/09/28/how-not-to-run-... (no paywall: https://archive.is/QWtQW https://archive.is/QWtQW)
BerislavLopac 4y 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.
deleted 4y ago
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roenxi 4y 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.
kypro 4y 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.
bvoq 4y 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.
- switch007 4y 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 https://ifs.org.uk/articles/mini-budget-response
guilhas 4y 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
- rcarr 4y 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 https://en.m.wikipedia.org/wiki/Zombie_bank
switch007 4y 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 4y 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 4y 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!!"

116 points by m33k44 4y ago

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

gerikson 4y 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_1er 4y 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 4y ago
Markets value competence, I think.
smt88 4y 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_1er 4y 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
  - mathieuh 4y ago
    "I will never be ashamed of quoting a bad author as long as the line is good" – Seneca
  - caoilte 4y ago
    That sort of fantastical thinking is quite rare outside of fringe parties (left and right). The UK Labour party's spending plans in 2019 were fully costed exactly in order not to spook the markets. (Naturally that's not how the media portrayed the situation of course.) Ignoring the markets hasn't been possible since Nixon ended the gold peg.
- kypro 4y 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.
bigfudge 4y 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 4y ago
  Its not hard to imagine. We've seen it just recently in Venezuela. https://en.wikipedia.org/wiki/Crisis_in_Venezuela https://en.wikipedia.org/wiki/Crisis_in_Venezuela
SilverBirch 4y 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.
chimprich 4y 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.
kypro 4y 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.

pyb 4y 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.

ksaxena 4y 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.
- afavour 4y 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.
- Someone 4y 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-consumers-rising-energy-prices https://www.bruegel.org/dataset/national-policies-shield-con..., the UK allocates about double of what France, Italy and Germany allocate to it.
  - notahacker 4y ago
    Further nuance: the UK government also ruled out trying to regain some of that expenditure on energy subsidies by increasing taxes on relevant energy company profits. And whilst the fiscal impact of the top rate tax cut (or indeed not introducing energy company windfall taxes) may not have been that huge relative to the energy subsidy, the signal sent by the the triumphal announcements that borrowing to cut taxes would solve problems was that the government wasn't just making emergency funds available to resolve a crisis, but has ceased to care about balancing their budget or inflation and doesn't really know what it's doing.

cbeach 4y 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 4y 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.
- bigfudge 4y ago
  Plus, the real damage is on value of gilts. Sterling is a secondary concern (although obv also inflationary)
- leg100 4y 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 4y ago

andy_ppp 4y 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 https://youtu.be/w-V5FVludFk

yuvadam 4y 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-the-us-already-in-one/ https://lookingglasseducation.com/whats-a-debt-spiral-and-is...

a3w 4y 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.
- ceejayoz 4y ago
  Not paying off all the debt and defaulting on debt are vastly different things.
  - roenxi 4y ago
    Are you potentially not a creditor? I think the term here is 'distinction without a difference'. If you lend the US enough money for a sandwich, you should expect not to get a sandwichworth of money back. What you call that legally is not that interesting, I suspect, to the people were lending the money.
    - ceejayoz 4y ago
      The creditors all get paid. The US has always made its debt payments. New loans get taken out while that happens. Non-$0 debt load, but no defaults. The only time the US ever paid off “all its debt” was during 1835-1836. One year out of more than 200.
      - roenxi 4y ago
        It doesn't matter what happened to creditors centuries ago. As it stands right now it is inconceivable that the US could or will pay off all its present and future creditors in real terms. Someone has lost a lot of money (presumably China and Japan). How could the US pay them back without resorting to fantasy? The debts are too high and the US economy is not big enough for any strategy to be politically feasible. Even coming up with a serious scenario where the US tries to pay down its debts is hard. It is likely that they are going to keep running up debts until they can't pay the interest any more, then default. The best outcome the US can achieve is semantic games where they pretend that giving people back less than was borrowed is somehow reasonable.

thewarrior 4y 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 4y 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".
- thewarrior 4y 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 4y ago
  All the housing stock will be snapped up by Blackstone and the like...

severine 4y 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.

imdsm 4y 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 4y ago
  Criticising politicians under an Ask HN on a topic for which said politicians are directly responsible seems entirely reasonable to me.

hunglee2 4y 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.

ksaxena 4y 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.
- hunglee2 4y 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
- chimprich 4y 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").
  - rcarr 4y ago
    You stole my joke from yesterday! https://news.ycombinator.com/item?id=33009959 https://news.ycombinator.com/item?id=33009959
4y ago

JonChesterfield 4y 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 4y 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-profit-pound-sterling-b2176258.html?amp https://www.independent.co.uk/news/uk/politics/tory-donor-pr...
- gadders 4y ago
  Good to see the conspiracy theories starting already.
- JonChesterfield 4y 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.

caoilte 4y 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 4y ago

If you're ok with a video format, I'd really recommend the TLDR News UK. (https://www.youtube.com/c/TLDRNews 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.

sixhobbits 4y 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.

SilverBirch 4y 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 4y 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?

rwmj 4y 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.

deleted 4y ago

[deleted]

emptyfile 4y 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 https://en.wikipedia.org/wiki/Britannia_Unchained

scrlk 4y 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-f48e30f8603c https://www.ft.com/content/f4a728a5-0179-48bd-b292-f48e30f86... (archive link: https://archive.ph/vRrGk 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 4y 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.

yieldcrv 4y 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).

psd1 4y ago
"gilts". It is not an acronym.

fffobar 4y 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 4y 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.
- deleted 4y ago
  [deleted]
chimprich 4y 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-Khwarizmi 4y 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 4y 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 4y 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 4y 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-a-country https://www.economist.com/leaders/2022/09/28/how-not-to-run-... (no paywall: https://archive.is/QWtQW https://archive.is/QWtQW)

BerislavLopac 4y 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.

deleted 4y ago

[deleted]

roenxi 4y 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.

kypro 4y 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.

bvoq 4y 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.

switch007 4y 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 https://ifs.org.uk/articles/mini-budget-response

guilhas 4y 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

rcarr 4y 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 https://en.m.wikipedia.org/wiki/Zombie_bank

switch007 4y 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 4y 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 4y 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!!"