“Storm in British financial markets points to politicians’ contradictions”

LBritish Prime Minister Liz Truss’s budget plan, which led to her swift resignation, has been called the biggest economic policy blunder of modern times. There are, no doubt, but very essential and troubling lessons that concern most governments on the planet. They want to reconcile the fight against inflation, the response to the energy crisis, and social demands to maintain incomes, all in an environment of great international uncertainty. The British confusion showed that this was an impossible task.

The A small budget was presented on September 23 First, exposure to harmful fundamentalism. Isn’t it amazing to refer to the trickle down theory that the tax exemption of the rich contributes to the prosperity of the poor? However, the experience of the past two decades has invalidated this belief. Stimulating supply by cutting taxes on the rich is not always effective, takes time and above all does not respond to energy shortages, one of the main sources of renewed inflation that is mobilizing public opinion today.

Substantial reductions in taxation on the profits and incomes of the super-wealthy have actually been financed by increases in public debt, setting in motion processes that worry many governments beyond the United Kingdom. In fact, investors, worried about rising public debt, will no longer buy public bonds, thereby affecting pension funds hoping to maintain interest rates at low levels by hedging themselves in the derivatives market.

According to their law, defined benefit pension funds must restore their position by selling public bonds, which exacerbates rising interest rates and starts a new cycle. This vicious circle almost wiped out the British financial system: during the emergency, the Bank of England had to allocate 65 billion pounds (72.8 billion euros) to stabilize the market for three weeks, which was contrary to the anti-inflationary policy. It is inconsistent with reducing the outstanding public debt. Thus follow a dogmatic approach to the economy, turmoil in financial markets, loss of government credibility and a new cycle of speculation that threatens financial stability.

A knot of contradictions

The storm in UK financial markets highlights many of the paradoxes facing policymakers. Indeed, the United Kingdom, like the United States, has embarked on a strategy to exit a prolonged phase of quantitative easing, characterized by nominal interest rates of near zero and the refinancing of structural public deficits. However, the latter increased with the 2008 crisis, then the Covid-19 pandemic, and the fight against runaway inflation after February 2022, especially related to the explosion in energy prices following the invasion of Ukraine.

In this article you should read 44.96%. The following is for subscribers only.