Hacker News Reader

Comment by hunglee2 | Hacker News Reader

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.

View on HN

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.

> 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.

> 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.

(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?

Increasing the money supply causes inflation. Rich people don't just put their money under their mattress. They invest it which means it's being given to other people who use it to buy things.

I understand why that might cause inflation. The projected cost is £55b, is this really enough to put the country in an inflationary meltdown?

IMHO the problem is that none of these measures actually guarantee (or even promote) economic growth and the realisation that the UK has economic illiterate leaders it's what's freaking the markets.

To be more precise, the market has realised that the economic illiteracy of our leaders is worse than previously feared.

And I use "leaders" with scornful irony

> They invest it which means it's being given to other people who use it to buy things.

Now do real estate investing.

Real estate investing means either paying people to build things for you, or paying people for something that's already built. Obviously building things causes inflation as you compete for commodities required to build, but buying already built real estate also means the seller now has money that they invest and that will eventually get consumed too.

Or the invested money will simply drive up share prices without giving anybody else money to buy things.

Yeah, the idea it's the tax cut isn't correct. That's not even a big tax cut. It's the energy price cap that utterly dominates. The left will insist otherwise because they hate tax cuts and love price controls, but that doesn't make it accurate.

The carnage happened at 9.30 am on Friday directly after the budget announcement, caused by the budget announcement. Energy subsidy was proposed earlier in the week. The market suddenly realised that kwasi and liz are irresponsible idealists and acted accordingly.

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.

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

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.

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.

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

> 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").

You stole my joke from yesterday! https://news.ycombinator.com/item?id=33009959

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?

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

I hope they recognize that’s what’s what will happen eventually, and change course sooner rather than later.

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.

> 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.

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.

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

What about the British Pension funds speculating the derivatives?

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

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

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.

Reply on news.ycombinator.com