Britain’s revolutionary leaders, Liz Truss and Kwasi Kwarteng, refuse to be cowed by reality



Signs that the British pound had stabilised and even begun to recover on Friday after a massive £65bn (€74bn) intervention by the UK’s central bank quickly faded as the country’s new, die-hard, leadership insisted even the near collapse of sterling would not alter their radical policy course.

n a week of jaw dropping surprises for the UK a headline from Reuters on Friday almost stole the show.

“Sterling set for biggest weekly rally since March 2020,” it ran, in as strong a case of missing the wood for the trees as I’ve come across in more than two decades in financial journalism. In the end, even the forecast of clawing back the week’s losses proved overdone.

Sterling sank again late on Friday after British Prime Minister Liz Truss and her Chancellor Kwasi Kwarteng met Britain’s budget watchdog and confirmed they plan to stick with their original calendar and wait until November 23 to provide new economic forecasts despite the massive economic damage wrought since their mini-budget a week ago.

That budget – the biggest tax giveaway in more than a generation to be paid for with borrowed funds – led to an immediate collapse in market confidence in the British government’s financial competence.

It sparked an immediate plunge in the value of the pound that by Tuesday this week had triggered a collapse in the market value of Britain’s long-term government bonds.

That near rout was halted by the Bank of England, the UK central bank, diving into the market to prop up prices

That in turn threatened to create a catastrophic wave of forced selling by UK pension managers who scrambled to find collateral to make up for the declining value of assets by liquidating positions.

That near rout was halted by the Bank of England, the UK central bank, diving into the market to prop up prices and eventually turn the tide of sentiment, but not before British banks dramatically hiked mortgage lending rates to levels that seem set to put huge downward pressure on house prices.

Even after all that, by the end of Friday’s trading session, Truss and Kwarteng opted to brazen out their budgetary stance, refused to bow to demands to publish growth forecasts and details of the forecast impact of their planned tax cuts.

There seems to be little to no prospect of the latest British government actually reversing the yet-to-be implemented tax-cuts package.

That sets up the pound and UK bonds for further pressure early next week and will copper-fasten the impression that the UK’s new political leadership is of true believers who plan to stick with their agenda of radically shaking up the post-Brexit British economy regardless of short-term consequences or markets reaction.

The round of huge, unfunded, tax cuts announced in the budget a week ago is only one part of that plan, though the one investors are most concerned over.

Truss and Kwarteng also plan to slash regulation, including environmental standards, among so-called ‘supply-side reforms’ aimed at making the UK more attractive to inward investment.

Those plans include seeking to draw pension funds to invest more in British infrastructure projects and businesses to invest more back into their own productivity, easing planning rules to make it easier to build homes and infrastructure and streamlining immigration rules now that the UK has left the European Union free travel area in order to attract and retain skilled workers.

Each of those policies is likely to face resistance from outside or even inside the Conservative Party, whose popularity has already collapsed.

Deregulation of the UK’s massive financial services sector is also a priority

Even more controversial is a wish to spark a revival of fossil fuel exploration, including new North Sea oil and gas production and ending a ban on fracking, a highly controversial method of extracting poor quality oil and gas deposits by pumping out the ground they are trapped in.

Deregulation of the UK’s massive financial services sector is also a priority – with Kwarteng promising “Big Bang 2.0” for the City of London as soon as this month – a reference to the original Big Bang in 1986 under Margaret Thatcher that swept away a swathe of long-standing financial regulations and restrictions.

It has been credited variously with spurring the development of London as Europe’s premier banking and insurance hub over the next two decades, and with setting the stage for what would eventually trigger the global financial crisis beginning in 2007.

The announcement in last week’s mini-budget that the UK would scrap a cap on bankers’ bonuses brought in by Britain along with other EU members in the wake of the crash, was a clear signal the new government plans to foster a more freewheeling version of capitalism than the more controlled version acceptable in European neighbours.

Ironically, the actual financial markets appear to be voting with their wallets

Ironically, the actual financial markets appear to be voting with their wallets.

The UK’s approach of budgetary policy unmoored from so-called ‘sound money principals’ means the pound, already prone to big swings since the 2016 Brexit vote, is becoming the world’s most volatile currency – a status normally associated with large emerging market economies and currencies tightly bound to commodities like oil or
metals.

The fall in the value of the pound combined with what for many British households will be a huge hike in borrowing costs means the course of the past week has already cancelled out any stimulus effect Liz Truss had hoped to unleash with their cuts to income tax, stamp duty and an energy price cap.

The markets have already voted. The British electorate however may not get their chance to cast a vote on their new prime minister for years yet. Under the UK’s parliamentary calendar the next general election is not due until January 2025.

For an economy that’s become almost unrecognisable in the space of a week, that’s a long time to wait and see whether their new leaders’ bold new policies pay off.



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