Joe Mayes Profile picture
Sep 28 32 tweets 10 min read
What's just happened to the UK economy? A thread on how we got here, and what's next for Liz Truss and Kwasi Kwarteng... 1/
Think back to the summer. Liz Truss and Rishi Sunak fought to be prime minister with competing visions on the economy. Sunak = be cautious, disciplined, bring down inflation. Truss = go for growth, borrow more, reject Treasury orthodoxy... 2/ bloomberg.com/news/articles/…
Truss enjoyed a big polling lead through the contest and ultimately won. Financial markets were already getting nervy over the summer, with UK assets declining in anticipation of her victory... 3/ bloomberg.com/news/articles/…
To be sure, it wasn't just the prospect of a Truss premiership hitting the £. The US $ has been v strong in recent months, due to the Federal Reserve aggressively hiking interest rates (faster than the Bank of England).. 4/ bloomberg.com/news/articles/…
Quick explanatory pause -- if US interest rates are higher than UK interest rates, that boosts the $ versus the £. Investors want to put more of their money in $-denominated bonds (bigger returns) than £-bonds, so they buy $, sell £ 5/
It was in this context that Liz Truss took the keys to No 10. Markets sceptical, the US economy strong, watching closely for her to unveil her economic plans. These were delayed by the national mourning period for Queen Elizabeth II... 6/ bloomberg.com/news/articles/…
It all comes to a head on Friday when Chancellor Kwasi Kwarteng reveals their plan, including biggest tax giveaways in half a century and extra £70 billion of government borrowing to pay for subsidising energy bills. It really spooks financial markets.. 7/ bloomberg.com/news/articles/…
Why? It's worth remembering that markets are like a beauty contest. You're constantly being judged against what your peers are doing (US, France, Germany, Japan etc), where investors could also be putting their money. So you must be very careful about... 8/
Sending out negative signals for investors which make you look less safe, trustworthy than your peers. *Perceptions are crucial*. But the Kwarteng plan had various red flags which were punished, including.. 9/
- Not publishing an independent fiscal forecast from the Office for Budget Responsibility (looked sketchy)
- Not announcing a medium-term plan to bring the public finances under control (looked like abandoning discipline).. 10/ bloomberg.com/news/articles/…
It was also against the backdrop of having fired the most senior civil servant in the Treasury, Tom Scholar. Again, this was a negative signal for markets, another blot on the Kwarteng/Truss copybook and their perception of trust on the economy 11/ bloomberg.com/news/articles/…
So the markets deliver their initial brutal verdict, £ slumps, UK bonds fall. Kwarteng then makes matters worse over the weekend by saying he wants to press ahead with more tax cuts -- amplifying the message and gung-ho approach that spooked markets 12/ bloomberg.com/news/articles/…
So the markets open on Monday and £ crashes to all-time low against the $. £ weakness has a significant real-world harm for the UK -- it makes imports more expensive and Britain imports a lot more than it exports. That means higher prices in shops... 13/ bloomberg.com/news/articles/…
Meanwhile the UK's borrowing costs started to rise quite alarmingly. (Quick explanatory pause - when bonds are falling, their `yield' rises eg the debt interest you pay on the bond. Falling govt bonds = higher costs of borrowing = bad for govt...) 14/ bloomberg.com/news/articles/…
And especially given the govt needs to borrow an extra £70bn to pay for its big energy support package. Now is a particularly bad time for borrowing to be more expensive, and that's why charts like these worry Tory MPs... 15/
The real-world harm of high government borrowing costs = more money spent on servicing your debts in interest payments, rather than on public services, schools & hospitals etc. Kwarteng told MPs y/day that a key metric he watches is borrowing costs... 16/
So Kwasi and the Bank of England go into attempted stabilization mode. On Monday they both put out statements trying to reassure the markets, with limited success.. 17/ bloomberg.com/news/articles/…
Situation calms a little on Tuesday, but still very volatile. Then the International Monetary Fund comes out and gives the UK a slapdown over its economic plan, a big embarrassment for a major economy... 18/ bloomberg.com/news/articles/…
And then we come to today, when the Bank makes an emergency intervention, saying it will step in and stave off a crash by buying long-dated bonds. It was looking very hairy this morning because.. 19/ bloomberg.com/news/articles/…
Pension funds particularly were in a bind. They're some of biggest holders of long-dated govt bonds and had obviously seen the value of those plunge in the last few days. They really needed help (read this for explanation on margin calls) 20/ bloomberg.com/news/articles/…
So what now for Kwarteng and Truss? They've created a situation verging on a financial crisis, requiring the central bank to step in to make amends for their economic plan. Their options are... 21/
1) No U-turn, battle on, hope the markets improve, ride it out. This strategy effectively relies on quite a bit of crossing of the fingers -- not sustainable if the markets continue to move against them.. 22/
2) U-turn, drop parts of the economic plan (eg row back on the top rate tax cut, shift strongly and relentlessly to a message of fiscal prudence), apologize, say you tried to do too much too quickly, bite the bullet, hope markets reward you (not guaranteed).. 23/
And that's it really. There's little else for it. Truss and Kwarteng are currently sticking to 1). Whether that's sustainable will depend on behaviour of the markets -- and whether her MPs allow her to go on. Tory conference will be interesting... ends/ bloomberg.com/news/newslette…
Thursday update: Truss firmly sticking to option 1) in BBC interviews this morning. £ is down ~1%. UK government bonds fell as Truss spoke. Market slide continues... 25/ @EllenAMilligan bloomberg.com/news/articles/…
Late Thursday update: £ ends the day by stabilizing. It was down as much as 1.2% earlier, but was up 1.8% at $1.10 as of 5pm. Still a volatile situation, markets watching every word from Truss and Kwarteng... 26/ bloomberg.com/news/articles/…
Friday update: Things looking better. The £ has recovered to its level before the Kwasi mini-budget. Why? The Bank of England intervention seems to have done the trick. Investors are now expecting.. 27/ bloomberg.com/news/articles/…
The Bank of England to push up interest rates faster in the near-term (see earlier tweet on why that’d boost the £). Quick explanation on what the Bank does.. 28/
The Bank’s main job is keep inflation (price increases in the economy) at 2% per year. It’s main tool to do this is interest rates. When it increases interest rates, that’s meant to reduce inflation. People put more money in savings, have to pay higher mortgages.. 29/
So there’s less money in the everyday economy buying stuff = less upward pressure on prices. Now, the BOE knows that a v weak £ pushes up inflation (UK imports become more expensive), so they would want to raise rates in response.. 30/
And the expectation of higher interest rates from the BOE is what’s helped the £ in the last few days. But obviously there’s an associated pain for the general public - looming higher mortgage costs 🥵 31/ bloomberg.com/news/articles/…
Truss and Kwarteng are also mulling cuts to public spending to stabilise the situation, in a bid to bring down government borrowing. That might reassure markets, but at what political/human cost.. 32/bloomberg.com/news/articles/…

• • •

Missing some Tweet in this thread? You can try to force a refresh
 

Keep Current with Joe Mayes

Joe Mayes Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!

PDF

Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @Joe_Mayes

Aug 17
The Conservative leadership race has been going for more than a month - nationwide hustings, TV debates, interviews. The candidates still haven't been asked a crucial q: Are you willing to start a trade war with the EU during a cost of living crisis? 1/ bloomberg.com/news/articles/…
At best Truss and Sunak have said they will keep pushing through the Northern Ireland Protocol bill, which would give ministers the power to unilaterally override the Brexit deal... 2/ bloomberg.com/news/articles/…
But they're yet to be pressed on the highly likely consequence of doing so - the EU, Britain's largest trading partner, imposing retaliatory tariffs on goods, exacerbating cost-of-living pressures 3/ bloomberg.com/news/articles/…
Read 4 tweets
Aug 9
A quick thought on these Tory hustings. Each time, Rishi Sunak dedicates a large chunk of his opening speech to his Conservative values. It’s at least half of the speech. This is very precious airtime with the voting membership. But what’s hard to understand.. 1/ Image
Is why he thinks that’s an effective approach against Liz Truss. She’s a Conservative too. She has those values. It’s not a reason to vote for Sunak over Truss. Truss on the other hand.. 2/
Dedicates her stump speech almost exclusively to specific Conservative policies she’d enact and specific policies she has already enacted, most of which weren’t offered by Sunak. If you like what you hear, it’s a clear reason to vote Truss.. 3/
Read 6 tweets
Aug 8
Exclusive: Norman Lamont, the Conservative chancellor who introduced the UK inflation target in 1992, says it would be a ‘terrible error’ to drop it 1/ bloomberg.com/news/articles/…
In her bid for 10 Downing Street, Liz Truss has said she’d review the mandate of the Bank of England, mooting a money supply target as one option to better control inflation 2/ bloomberg.com/news/articles/…
Truss has argued that one of the biggest causes of inflation has been loose monetary policy eg too much money printing by the BOE. The BOE hasn’t been tough enough on money supply, she’s said 3/ bloomberg.com/news/articles/…
Read 9 tweets
Aug 2
Truss's regional pay boards would've been another set-back for the `levelling up' promise -- a pledge which has been stalling badly since 2019... 1/ bloomberg.com/graphics/uk-le…
Remember what Boris Johnson said he'd do at the 2019 election. He would close the gap between the richest and most deprived areas of Britain. Three years on, the gap between London & the SE vs the rest of the country has actually *widened* 2/ Image
The data which shows the widening gap is here. Bloomberg is tracking metrics such as salaries, housing affordability, investment in public services & transport, life expectancy, well-being, broadband coverage, foreign direct investment 3/ bloomberg.com/graphics/uk-le… Image
Read 13 tweets
Jul 11
Breaking: Candidates to be prime minister will need the support of at least 20 Tory MPs to get on the ballot paper, according to plans drawn up by the 1922 committee 1/ bloomberg.com/news/articles/… w/ @alexwickham @elashton
The Conservative Party is trying to quickly whittle down the 11-strong field of candidates to be the next PM. The 20 MP threshold is about 5% of all Tories -- up from the 8 MP threshold in the 2019 vote (which was about 2% of Tories) 2/ bloomberg.com/news/articles/…
There are currently only 3 candidates who have more than 20 publicly declared supporters: Rishi Sunak, Penny Mordaunt and Tom Tugendhat. But of course, it's super early days - only about half of the party's MPs have declared their allegiance 3/ docs.google.com/spreadsheets/d…
Read 7 tweets
Jul 7
New: An officer on the 1922 executive tells me they want the field of candidates whittled down to two by July 21 (when Parliament goes on recess), and new leader decided by September bloomberg.com/news/live-blog…
The '22 will also impose restrictions to limit the size of the field of candidates e.g. requiring MPs to have a certain number of backers to get on the ballot paper. They will also consider knocking out MPs if they receive less than a certain % of votes 2/ bloomberg.com/news/articles/…
The exact sequence is going to be:
- Elections to the 1922 executive on Monday afternoon
- New 1922 executive decides the rules of the leadership contest
- Aim to have final run-off decided by July 21
3/
Read 5 tweets

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Don't want to be a Premium member but still want to support us?

Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal

Or Donate anonymously using crypto!

Ethereum

0xfe58350B80634f60Fa6Dc149a72b4DFbc17D341E copy

Bitcoin

3ATGMxNzCUFzxpMCHL5sWSt4DVtS8UqXpi copy

Thank you for your support!

Follow Us on Twitter!

:(