October 24, 2022 - 7:00am
In the inverted world of mainstream media, the verdict is in. Liz Truss and her merry men of “morons” (as the FT has nicely termed them) have destroyed Britain. They did the deed by killing off the pound and the gilt market with a tax cut. And, of course: Brexit.
Even Michel Barnier confirms it. “Not all of these difficulties are due to Brexit, I am simply convinced that Brexit makes everything more difficult,” he tweeted.
Unfortunately for Mr Barnier and co., the idea that Brexit, Liz Truss and the mini-budget had anything concrete to do with the bond crash and related economic shambles is laughable. Of course, they got things wrong: the comms strategy and reluctance to consult the OBR ahead of the mini-budget release was dim-witted. But their communications failures were no worse than those of the Governor of the Bank of England Andrew Bailey, who told the public they were facing Armageddon and should not ask for pay rises.
So who or what is really to blame?
A place to start would be with lockdown, not Brexit, as the source of today’s UK troubles. This was the first emergency that brought uncosted commitments onto government balance sheets in conjunction with epic central bank support. ‘Spend now, cost later’ was the mantra of the day.
The next factor that turned an already pressing crisis into an even bigger one was the abject denial by most officials, commentators and central bankers over the course of 2020 and 2021 to admit any of this lockdown stuff might be inflationary. They insisted that this was a “transitory” supply-side driven thing. It would go away all on its own.
When natural gas prices started going up in the fourth quarter of 2021, we were told this had nothing to do with net-zero driven underinvestment in energy over the course of the last five years. It too would be resolved. And a gas-rich power with a vendetta would never dream of exploiting our vulnerability, either.
But then Russia invaded Ukraine. And Europe decided in unison to cut the continent off from Russian gas as a penalty — even if this amounted to using its own citizenry as a human shield in a war with Putin. Time and time again we were told this would be manageable. “The West” could handle the inflationary consequences. We would get through it. As for the markets and laissez-faire principles, well, meh.
When energy companies started going bankrupt, and customers started facing soaring bills, nobody seemed to mind about the huge cost of an open-ended energy cap and energy company guarantee scheme. None of that was a political problem. But a tax cut on the 45p rate of income tax — that was enough to break the camel’s back.
SocGen chief economist Albert Edwards is closer to the mark. He blames it on Andrew Bailey’s stubborn commitment to maintain a quantitative tightening path despite the economic headwinds the UK was facing. “Gilts were stable for a week before the budget as 90% of the measures were already factored in,” he noted in a tweet. “Gilts started their collapse the day BEFORE the budget as the BoE reaffirmed aggressive QT. We have no idea how much of the collapse was due to QT, LDI or the budget.”
He’s right. And that doesn’t even factor in the fact that the UK pound is a hard currency reserve asset. Unlike Ecuador or Russia or any other emerging state — indeed, even unlike every Eurozone country — the UK borrows in its own currency. This gives it options other countries do not have. Those who lend to Britain are supposed to understand that risk. Since they can’t do anything directly about it, if and when it looks like Britain is near going down the debasement route they engage in hysterics.
But Britain can ignore those hysterics for as long as it has other variables in the economy to attract the goods, services and commodities it needs when the pound takes a beating.
Thankfully, it has many such variables. Chief among them is its highly educated English-speaking population that a cheap pound will only make an increasing bargain to hire. It also has a second-to-none further education system. Culture. Energy. History. Tourism. Connections with the Commonwealth. Most important of all it has immense spare labour capacity (albeit with the right incentives and conditions) to make reshoring all the remaining stuff it needs conceivable and possible.
But it doesn’t even have to get to that — Britain has another trick up its sleeve. As a next step, it could stimulate domestic demand for any new bond issuance, which can be achieved through regulatory capture (i.e. forcing UK pension funds to hold an ever larger amount of gilts). It can also be done by stimulating domestic investment demand, say by issuing a special series of “Elizabeth bonds” directly to the public as Neil Collins has also wonderfully explained.
Unlike what the propagandists would have you think, Britain is not a basket case. Britain has real sovereignty. It just needs a steely leader to leverage that sovereignty in the interests of its own population. If it can restructure itself, it can generate all the growth it needs.
Izabella Kaminska is the former editor of FT Alphaville and founder of The Blind Spot.
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SubscribeI cannot judge what the article says about economics as I know nothing about it, but I have wondered too, in my blissful ignorance, why the money tree is fine if you use it *endlessly* for COVID or for a gas price cap (btw, I am now paying LESS than 2 winters ago), but not if you want a tax cut.
Perhaps because the “Money Tree” only has a limited supply of leaves, and they have been used for COVID and are committed for fuel price relief.
Using your analogy…
The supply of leaves is near infinite; the tree continually grows more.
However, the more we pick the smaller (and less valuable) they get.
Unless, of course, you are the USA with THE global reserve currency. In which case you don’t have one of your own, you are essentially are picking from everyone else’s trees.
One key factor that is never mentioned ( not that it matters on this medium as most peoples chronic ignorance on gilts/ debt capital markets does not prevent them expressing toe- curlingly crass statements) is that unlike, for example Italy, where the gilt equivalent BTP is mainly held by retail domestic investors, the Bank of England and Treasury stubbornly refuse to creat a system whereby gilts can be bought by retail investors ” over the counter’ in ThePost Office and banks, so giving access to a massive secure domestic markets. Various investment banks, including Citi and Rothschilds proposed such a system, but the UK clearing banks lobbied against it for fear of losing deposits: Rishi could, and should introduce such a system overnight, and it would have huge positive effect on the gilts market…… Teslas ludicrous ” value” is based on retail investors… mostly bearded, I suspect.
Izabella seems much more informed and less hysterical than the mainstream press. Good to see this on Unherd.
As a next step, it could stimulate domestic demand for any new bond issuance, which can be achieved through regulatory capture (i.e. forcing UK pension funds to hold an ever larger amount of gilts).
But the Gilts do not pay enough interest to pay the pension they are committed to. The LDI (liability-driven investment ) was used because Interest was held at Zero so the pensions had to ‘Borrow’ against assets (Leverage) to buy a greater amount assets (Hedge fund derivatives) to makethe payments, using their Gilts as collateral. 100% fault of keeping interest at zero.
LONDON (Reuters) – The Bank of England intervened in the UK government bond market to rein in gilt yields, which rocketed after Britain unveiled a welter of tax cuts to be funded by borrowing on markets.
It shone a light on a little-known corner of Britain’s pensions sector – liability-driven investment or LDI.
WHAT IS LDI?
A moneyspinner for asset managers.
Defined benefit pensions have to make sure that their assets, such as stocks and bonds, can generate enough cash to meet liabilities – the monthly payouts guaranteed to pensioners.
LDI is a popular product sold by asset managers like BlackRock, Legal & General and Schroders to pension funds, using derivatives to help them “match” assets and liabilities so there is no risk of shortfall in money to pay pensioners.
LDI was worth about 400 billion pounds ($453 billion) in 2011, quadrupling to 1.6 trillion pounds by 2021, according to the Investment Association.
HOW DOES IT WORK?
Pension funds have to post cash as collateral against their LDI derivatives in case they turn sour.
The amount of cash needed rises and falls in tandem with values of the underlying assets tracked by the derivatives, which are a type of ‘insurance’ contract for guarding against unexpected moves in markets.
WHAT WENT WRONG WITH LDI?
Rocketing rates.
Interest rates have been on the way up for months as central banks hiked borrowing costs in a well-flagged manner, giving pension funds time to adjust and find collateral over several days.
But when UK bond yields rocketed in just days, it triggered emergency collateral calls for pension funds to cover their LDI-related derivatives in a matter of hours as rising yields mean the value of bonds falls.
Pension funds struggled to find the cash in such a short time, forcing some to sell gilts, thereby putting further downward pressure on the bond market.
To avoid instability in markets, the Bank of England stepped in to buy gilts worth 65 billion pounds, sending yields lower and taking pressure off the pension funds.
PROBLEM SOLVED?
For now.
How can Defined Benefit pensions make money to pay out when interest is zero? Equities? Because they are in a bear market – no it forces them to Derivatives – and so risk, and almost caused a ‘Sovereign Debt Crisis’. Interest at zero is madness.
https://money.usnews.com/investing/news/articles/2022-10-04/explainer-what-is-ldi-liability-driven-investment-strategy-explained
Yes, I am not sure that would be the first solution. I have to admit I hadn’t heard of LDI’s until they went bang. I remember John Stepek saying that it seems a lot of the market is now designed for low interest rates and maybe they won’t work at higher interest rates. However, I do like getting non hysterical opinions from people with knowledge of the markets.
Just to welcome an interesting financial journalist who has a more varied financial background than many.
Izabella started her journalistic career in 2001 as a junior reporter for the Warsaw Business Journal. She then moved to the Soviet Union at the Caspian Business News, which took her to Azerbaijan and Georgia. In 2003 she reported as a freelancer from Kabul, Afghanistan, before joining BP as an Associate Editor of the company’s internal magazine Horizon in 2004. So she has practical knowledge of a variety of financial systems and after 2005 She joined Platts to focus on the reporting of European natural gas markets. So she has knowledge of the functioning of the oil markets. Her current project, The Blind Spot, is described as a two-part plan to try and help reconfigure how journalistic information is organised on the internet.
In this article she helps to dispel some of the hysteria generated by the MSM. Yes we are facing a difficult time as a result of the policies adopted during the pandemic and the Ukrainian war and the UK needs reforms but so do many other countries. I can remember visiting the US well over thirty years ago when the pound was flirting with parity with the dollar. Things changed and will continue to do so we don’t need to catastrophise everything even if the MSM needs to maintain the drama to keep people viewing and reading.
“I can remember visiting the US well over thirty years ago when the pond was flirting with parity with the dollar.”
So you went across the pound, then?
Well spotted.
Seriously though, we do need journalists like Izabella to provide some balance to the mob of hysterical, dumbed-down, narrative slaves who ply their trade in the MSM.
Moved to the Soviet Union…after 2003? I hope a slip of the pen.
“former” of course
Did anyone understand differently?
”Things changed and will continue to do so we don’t need to catastrophise everything even if the MSM needs to maintain the drama to keep people viewing and reading.”
I am reading a book on UK politics late 1930s (The Last Lion) and how Chruchill alone was telling of the coming, Looming, war with Germany – but Baldwin, Chanberlain and McDonald not only refused to arm the Nation, slowed arming so as to not alarm Germany. They refused to borrow a penny for military.
The Times was pro-German, as were most sources; at the least were down playing any chance of threat. The whole MSM was telling all there was NO danger with Germany rearming. The Prime Ministers and Parliament refused any talk on the coming war – because they refused to talk of it, or believe in it, so UK was utterly unprepared – but for a few good men who developed and built some Hurricanes and Spitfires Britian would have been conquered by Germany!
And you call this looming global Depression, and likely almost WWIII, and good chance of ‘Sovereign Debt Crisis’ in some Fiat currencies ‘Drama’???
But that’s not the drama pushed by the MSM. It is all based on parochial UK concerns and finger pointing, often in the wrong direction, and without the proper context. We would not be uniquely affected by the potential Sovereign Debt Crisis you refer to. Hopefully there are some wise heads that are working on the social and financial Hurricanes and Spitfires we may need in the future.
But she’s also an ‘alumni’ of the FT during the whole period building up to Brexit when the FT consistently went against Brexit with biased reports citing only sources tilted towards its EUrophile agenda, and sometimes even resorted to the ‘fruitcake’ ad hominem arguments.
Did she contribute to writing such biased material in that time?
I don’t know, but I wouldn’t hold it against her if she put up a sensible case for staying in. Although I was not happy with the direction of travel in the EU in fact I voted to stay largely because I knew the EU would make negotiations as difficult as possible and with the bulk of MPs being in favour of remaining I had little faith that a satisfactory exit would be negotiated or that the advantages of Brexit would be exploited properly. We are still in an unsatisfactory limbo and have failed to take much advantage of our altered status an an independent nation. As a pessimist regarding the political class I don’t blame anyone taking a sensible remain stance ie not one relying on the exaggerated disaster scenarios.
Fair enough. I think it was our last chance to get out, as no country will be permitted to leave in future. So I’m pleased we’re out and can make our own choices and errors.
Me too – particularly in the light of the EU bullying Hungary to allow trans ideology to be transmitted to their young.
The main problem with governing the UK is that half the political elite, NGOs and Civil Service actively work to undermine the government of the day in an effort to ensure their predictions of doom regarding Brexit are proved true. They just can’t let it go, even if it requires damaging the country.
Good analysis. Here on the continent, there are still plenty of people who love to point to the UK’s problems as being proof positive that Brexit was a bad idea. All the while ignoring the fact that things are just as bad here (energy shortage, inflation, etc.).
Good analyses – replacing Bailey at BoE with someone more up for grappling with these troubled times, like Andrew Haldane, might have done more good than replacing Truss (given that she’s only have 2 years max in no 10). And great to see Izabella here – one of the writers I most miss from my FT sub along with Martin Sandbu & Wolf.
At last some sane commentary from someone who seems immune to the hyperbolic codswallop put out by her former colleagues. The Economist is every bit as bad and they have long had their knife into Italy. Pity that many of the rest of us find it an exceptionally pleasant place to live or stay. The main lesson is to ignore what goes in Rome and embed yourself in the local community. Many Americans have the same view of Washington and New York. In the UK we should learn to do the same and ignore what goes on in London.
What this illustrates is that in an environment in which media are competing for instant attention the majority of what is published is unthinking and self-reinforcing tosh. It takes time and distance to separate ephemeral reaction from serious analysis. Sadly, Unherd is very obviously falling into the same trap. It wants to seem relevant and up-to-date but to do that it relies upon a small group of fluent but rather narrow-minded writers. The solution isn’t to ask Ms. Kaminska to write more frequently – we all repeat ourselves – but to have a large number of writers who are limited to publishing no more than, say, 1 article per fortnight or per month.
It just needs a steely leader to leverage that sovereignty in the interests of its own population.
And when did we last have such a steel leader? All have put being ‘good Europeans’, or generous foreign aid donors, or welcoming to migrants, or eliminating carbon from energy consumption, above the interests of its population.
An excellent polemic thank you, and also impeccable timing, the day before the anniversary of Agincourt. (1415).
Yes – I can hear Boris (or Sunak) standing on a table with a flagon of wine calling the attention of all the ‘In’ politicos’ in the cabal and giving a rendition of the Henry V speech, but with one change – substitute the word ‘Vipers’ for Brothers:
‘We few, we happy few, we band of brothers
For he today that sheds his blood with me
Shall be my brother, be he ne’er so vile,
This day shall gentle his condition:
And gentlemen in England now a-bed
Shall think themselves accursed they were not here,
And hold their manhoods cheap whiles any speaks
That fought with us upon Saint Crispin’s day.’
‘We few, we happy few, we band of vipers’
Isabella is that increasingly rare independent, critical thinking journalist who is deeply aware of her field. I contrast her article with the glib complacent piece by Peter Franklin, which effectively says ‘let me do your thinking for you; everything is fine the adults are in charge. This exonerates the Covidians and money printers from any blame especially Hunt, Bailey and the lockdown loving labour crowd. We need better ideas and Isabella shows the way.
“If it can restructure itself, it can generate all the growth it needs. “
That word “If”
Exactly – it Can…but only by huge ‘Pain’, as in huge recession, mass unemployment, and coming to grips with borrowing to pay for unproductive spending.
If Britain were to rejoin the EU do you think we would be forced to adopt the Euro?
I don’t know why I’m being down voted. I just asked a question. I had hoped that someone more knowledgeable than me would answer. I don’t want to rejoin the EU. Being forced to join the Euro would be a good reason not to rejoin in my opinion.
I guess voted down on the principle of don’t give EU technocrats ideas.
I understand that all new members have to commit to adopting the Euro and make appropriate adjustments to facilitate this, even if they don’t adopt it immediately.
Thanks Mike, There are 8 EU countries in the EU which are not in the Eurozone including some of the more recent ones like Poland, Hungary and Romania. There seems to be some kind of get out clause which allows Sweden to remain out of the Euro. I thought the EU might impose such a condition on the UK’s returning as a kind of penance for being ‘difficult’.
The question was triggered after I read a report of ‘thousands’ of demonstrators in London calling on the government to rejoin the EU – the cost of leaving crisis they called it. Plus I’m don’t trust Kier Starmer to stick to his promise to ‘make brexit work’.
The UK had a similar agreement whilst we were there.
He will probably make it work by creating a Brexit in name only.
Yes.
The loss of sovereignty would be near total.
Wouldnt we? It is the EU law. Do you think the UK would get a derogation?
Thanks Anna, I wasn’t assuming we’d get a derogation. I had thought it was the rule but on the other hand there are some countries who joined the EU after 1999 who are not in the Eurozone so I wasn’t sure what the situation was hence the question.
The situation regarding Scotland is interesting. I believe Nichola Sturgeon has said that an independent Scotland would join the EU but adopt Sterling as it’s currency which from what people have said here would be a non-starter.
“A place to start would be with lockdown.”
Actually a good place to start would be the abandonment by Brown ~2005 of the economic policies inherited in 1997, followed by the 2008 financial crisis, upon which QE started.
Inexplicably, the BoE chose almost the same day as the ‘mini-budget’ to end QE. I’ve yet to read anyone comment on that. Was it stupidity, ignorance of what the new government’s policies, or malice?
But Iz-abella (my machine just won’t let me spell your name correctly), the media needs the hysteria to get clicks. Sensible articles like this wouldn’t qualify.