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.
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5 thoughts on “Albert Edwards Has A Different View Of UK’s Historic Week”
UK inflation is surging, supply of labor and other resources is strained, currency and bond markets are fragile, Truss making an aggressive pro-growth move at such a point is what is bonkers, made even worse that the move is essentially to fund tax cuts with higher deficits in hopes for some of that elusive supply-side magic.
If anything, Sunak’s plan to raise taxes makes more sense. If tax increases slow the economy, that’s what the UK inflation fight needs, especially if the increases are targeted. Beefing up sovereign finances into an especially perilous period is a good idea. The UK is not the US and does not operate with the same margin for error.
The above is even more so, I think, when the government is about to spend an appreciable percent of GDP in energy support.
I hope it is not too late for the UK to correct course.
Reading the last three posts from H today, suddenly prompted me to note to myself that we haven’t heard anything from Bonnie Royal Charlie yet. His country’s headed for the plughole and the only thing he seems to be focused on is what to call everyone now and his sudden freedom to bury his wayward son Harry and that bad lady he married. So, for the coronation these two will be banished to the children’s playroom with no supper. Doesn’t look like he will be much of a king, especially if his country goes back to the third world. Eventually, however, they will get all their new titles straight.
I believe the tradition set by the King’s Mother and her forefathers and the constitution is to keep mum on political affairs.
That hasn’t stopped him until now. However, he is the new king and GB is under existential threat.
Truss went overboard without proper process, which killed market confidence. Her electric bailout was not targeted properly either. Lousy policy