UK's Economy Crisis Warns Stability On Global Financial System

UK's Economy Crisis Warns Stability On Global Financial System

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October 12, 2022 - 6:01 am

UK’s Economy Continues With The Pound Tumbling And Markets Crashing


The UK's quick transition from stability to crisis raises the possibility of financial markets destabilising and exposing the frailty of global efforts to fight inflation. Troubles in the United Kingdom economy continue, with the pound tumbling and markets crashing. Britain's Economy is in crisis and the world looks set for a recession or stagflation, to make sense of the UK mayhem and more. Their tax and spending strategies were revealed by the new prime minister, Liz Truss, and her finance minister, Chancellor Kwasi Kwarteng. This "mini-budget" was the exact opposite; it immediately led the pound to fall to its lowest level ever against the dollar, crashed the price of UK government bonds (often known as "gilts"), and nearly brought about a pension fund collapse comparable to the global financial crisis. The IMF criticised the plan and expressed concern that it would increase economic inequality.

                                                  

Backdrop of UK’s Economy crisis

The backdrop is deeper. It dates back to the 2016 vote for Brexit. This was a decision taken in the face of every single serious economic opinion in the world...and in a sense ever since that moment, we've been waiting for the shoe to drop. The current generation of Tories believe they are on a mission to reduce taxes and eliminate regulations in Britain in order to create incentives, but they are ignoring the sensibilities of the market. And the passage of a massive energy price stabilisation package in quick succession is what the markets are concerned about. The other urgent issue at play in this situation is that Europe is currently experiencing a severe energy crisis as a result of Russia's conflict with Ukraine and tensions on the international gas markets, which were already evident in 2021. Gas prices have occasionally reached the level of $1,000 per barrel of oil. The administration passed the deal fairly shortly after entering office a few weeks ago, so these are really remarkable pricing. (The package is) Valued at 150 billion pounds, that's about 5% of GDP. 

                                                     After that, they presented a budget and proposed additional tax cuts of 45 billion pounds, all of which would be given away and not invested in or targeted. Simply handouts to the vast majority of the wealthiest Britons. Surprisingly, the markets panicked despite being flooded with those who stand to gain from the tax decrease. They suddenly get the impression that this government has no sense of bounds. Now, defenders of the government will say they expect the Bank of England to jack the interest rate up and that's part of the plan and the government will subsequently offer a plan to cut spending in order to balance the government's (budget) in due course, or a few weeks later in November. All the markets are basically signalling is (that) this program doesn't make sense to them. There is no basis for assuming that it will result in more rapid growth. In essence, you're suggesting that by not accelerating GDP, you're going to significantly increase the debt burden. What actually started to happen was something considerably more frantic, when people tried to sell off all of their UK assets. So the exchange rate started going down, which is normally something you see in advanced economies, but it is a sudden storm, an Emerging Market type spiral. So that got people freaked out. The UK Treasury(Gilt) Market is also affected by a number of extremely technical issues. 

                                                         

Rising Interest Rates

Rising interest rates are generally advantageous for pension investors because they will support their long-term objectives. However, many of these pension funds had taken precautions to protect themselves from the possibility of increased interest rates. They were then asked for greater collateral on these arrangements, which forced them to start selling what they thought of as the most stable sort of asset, which is the gilt. The unexpected shift in interest rates alone was enough to unwind such hedging techniques and force the pension funds to cover. And as a result, a highly toxic spiral started to develop because when panicked selling started, fire sales spread throughout the market. So much so that the Bank of England determined this week's financial stability in the UK was in jeopardy early on.

                                                           

Future Changes in British Economy

In spite of a slowdown in hiring and corporate investment, it will likely take until 2024 for the British economy to return to its pre-Covid levels as both individuals and businesses battle with rising expenses. It must engage in the struggle for political power to pave the way for the reconstruction of the economy on socialist principles in light of the ongoing decay and disintegration of the capitalist economy, which will bring about a future of social and economic devastation along with the ever-increasing threat of war, the ongoing mass killing caused by COVID, and the disastrous effects of climate change. Although the UK's difficult week may appear to be a local issue at first, it is actually a sign of a larger range of issues facing Europe. Despite all of the Truss plan's shortcomings, which are numerous, the emphasis on sluggish economic growth is fair. However, more than fast remedies are required if the UK and the rest of Europe are to revive their economy. The public and commercial sectors need to make a commitment to spending money on climate change mitigation and productivity-boosting technology.

Questions and Answers Questions and Answers

Question : What is the UK's mini-budget?
Answers : The UK's mini-budget is a plan that was put in place by the new prime minister, Liz Truss, and her finance minister, Chancellor Kwasi Kwarteng. It involves tax and spending strategies that were meant to help the economy.
Question : What is the IMF's opinion of the UK's plan to reduce taxes and regulations?
Answers : The IMF criticized the plan, expressing concern that it would increase economic inequality.
Question : What is the value of the package presented by the administration?
Answers : The package is valued at 150 billion pounds.
Question : What are the markets signalling?
Answers : The markets are signalling that the government's program doesn't make sense and that there is no basis for assuming that it will result in more rapid growth.
Question : What is the UK Treasury(Gilt) Market?
Answers : The UK Treasury (Gilt) Market is a market where people buy and sell government bonds.
Question : What is the impact of rising interest rates on pension funds?
Answers : Rising interest rates generally have a positive impact on pension funds by supporting their long-term objectives. However, many pension funds had taken precautions to protect themselves from the possibility of increased interest rates, which led to the need for greater collateral and forced selling of assets.
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