The ongoing crisis in the UK may not be all Liz Truss’s fault.
I’m certainly inclined to suggest that a little foresight on her part might’ve gone a long way towards preventing the highly unfortunate series of events that transpired in the days since Kwasi Kwarteng unveiled unfunded tax cuts as part of a broader package of measures aimed at rescuing the economy from a prolonged recession. And I’ve (obviously) been a staunch critic of Truss’s handling of the nation’s burgeoning financial crisis.
But, as SocGen’s incorrigible, yet exceedingly affable, bear, Albert Edwards, was keen to point out Thursday, it might be unfair to put the blame solely on fiscal policy.
“I believe it’s too easy to blame the budget’s dash for growth as the trigger,” Edwards wrote, in a new note. “Indeed, the recent unprecedented criticism of a G7 budget by the IMF just reinforces my view that the Davos-consensus on the ‘correct’ economic policies to pursue were never going to tolerate someone trying to break away from the pack without trying to bring them into line,” he added.
For Albert, the BoE’s “failure” to hike 75bps last week in lockstep with the Fed, and the bank’s concurrent decision to move forward with gilt sales (i.e., QT) set the stage for the historic meltdown in UK government bonds (figure below).
He did, however, concede that Kwarteng was “unsuspecting and overly complacent.”
I’ve noted on multiple occasions that the juxtaposition between new gilt issuance to fund the growth plan and the BoE’s QT efforts was indeed a contributing factor to the collapse in gilts. I just don’t necessarily agree with Edwards on the sequencing. The BoE telegraphed its QT intentions months ago. The market was well apprised.
In any event, there’s no question that the tension between the government issuing more debt and the central buying less of it was part and parcel of the problem. “One could reasonably suggest,” Albert said, that going ahead with active gilt sales “at a time when global bond markets were already under severe pressure was foolhardy.” I won’t argue that. Not for a second.
Edwards is, of course, a dedicated contrarian. It’s not surprising that he’d push back on the official narrative, but I’d be remiss not to concede that he’s closer to the crisis and infinitely more familiar with the Bank of England than I am, so I’d be derelict not to at least highlight his views during this historic week.
“Commentators are lining up to claim this was the biggest fiscal stimulus since the disastrous Barber Budget of 1972 [but] that comparison is utter rubbish, because it compares the mini-budget to the former Chancellor Rishi Sunak’s plans to impose massive tax hikes on corporations and national insurance contributions, and not to the current status quo,” Albert went on to write, before not-so-gently suggesting that “hiking taxes going into a recession, as Sunak was about to do, was in my opinion, bonkers.”
For Edwards, the pre-Truss trajectory was just another manifestation of “the failed policy of fiscal austerity leading to the tight-fiscal/easy-monetary policy mix of which the Davos-consensus so approve.” He had a subtle suggestion for why the Davos crowd prefers such a mix: “Maybe it’s because it pushes financial asset prices to the moon,” he wrote.