Britain’s financial turmoil can be contagious.Pandemic is the root cause

Just weeks after Britain’s new prime minister, Liz Truss, took office, financial turmoil hit Britain and sent shockwaves through global financial markets.

On September 23, UK Finance Minister Kwasi Kwarten unveiled the most radical package of tax cuts in nearly 50 years, calling it a “new era” for the UK economy. The package included a reduction in the top rate of income tax for high-income earners, as well as reductions in income tax and stamp duty for homeowners.

“We need a new approach for a new era, focused on growth,” said Kwarteng.

Immediately after the announcement, GBP/USD plummeted, dropping to an all-time low of 1.0327.

Then Gilts—British Government Bonds—plummeted, causing unprecedented margin calls for bond funds, including many pension funds. Pension funds raised money by selling both government bonds and investment-grade corporate bonds, driving bond prices even lower.

On 29 September, the Bank of England Announced purchase of approximately £65 billion ($69 billion) As it sought to restore order in the market, the bank of long-term British government bonds said that the tax cut plan would lead to a sharp decline in the UK’s asset prices, which, if left unchecked, could undermine the country’s financial system and economy. said.

Expert analysis of the UK economy

The death of the Queen, the conflict between Russia and Ukraine, the energy crisis and high inflation have all had a significant negative impact on Britain’s economic growth, according to North America-based investment adviser Mike Sun.

“Faced with deteriorating economic conditions, the UK government has taken the risky move of introducing an extreme tax cut stimulus,” Sun told The Epoch Times.

“For fiscal stimulus to work, the coffers have to be plentiful. “Tax cuts will further widen fiscal inequality, which will need to be compensated for by issuing government bonds.”

US-based economist Davy Jun Huang said the sweeping reforms of the truss against the backdrop of global hyperinflation and rising interest rates contrasted with tightening economic policies in Europe and the US. I believe there is.

“Markets and economists believe aggressive easing in the UK will lead to a significant increase in the fiscal deficit at a time when the mainstream economy is tightening its fiscal policy,” Huang told the Epoch Times.

“Pandemic support, tax cuts and fiscal slack over the past few years have led to an increase in fiscal debt. Along with a strong dollar and a war crisis between Russia and Ukraine, there has been a significant outflow of hot money from the UK, it will get worse. [its] Inflation is already high. “

“These factors will inevitably lead the market to believe that Sterling is short on gold,” Huang continued. “The combination of a strong dollar and uncertainty over the new prime minister’s aggressive reforms has greatly increased the likelihood of a recession. increased concern.”

Frank Tien Xi, a professor at the University of South Carolina’s Aiken School of Business, speculated that Congress could investigate Kwarten’s actions and seek Kwarten’s resignation even if Truss did not oppose its policy. “

“It is clear that the Truss administration supports tax cuts to save the UK from a pinch, but the coverage and details of the policy are poorly thought out and require further deliberation,” Xie told The Epoch Times. rice field.

“However, with the overall economic situation in the UK so deteriorating, government inefficiencies and a tacit lack of understanding in their operations are undermining investor confidence, further exacerbating market turmoil and further derailing the European economy. will have a direct impact on the financial markets of

UK financial turmoil raises global alarm

The UK financial turmoil sounds alarm bells at a time when countries are experiencing inflation and central banks are aggressively raising interest rates.

The United Kingdom is the world’s sixth largest economy, London is the second largest international financial center, and the pound is one of the world’s most actively traded currencies.

The turmoil in the UK’s financial markets is therefore having a major impact on global financial markets, especially as the world’s major economies are experiencing the worst inflation of the 21st century, said Jun Huang.

“The United States, the largest economy, has sharply raised interest rates…which has led to widespread fears of a recession. and still advocates a “COVID zero” policy. And the war between Russia and Ukraine brings humanity closest to a nuclear crisis in this century,” he said.

“An untimely financial turmoil in the UK could spread a ‘contagious scare’ internationally and lead to a ‘simultaneous sell-off in global capital markets’.”

The ICE BofA Move Index, which tracks the volatility of US Treasury forecasts, Reached highest level since March 2020This marks the $24 trillion U.S. Treasury market facing its most severe turmoil since the outbreak of COVID-19.

The Fear & Greed Index is a technical indicator used by traders to measure the strength of their willingness to buy or sell the pound. at the lowest level Since the first wave of the COVID-19 crisis.

The global rating agency Moody’s Gives a ‘negative’ assessment of UK tax cutsargued that such a move would undermine the UK’s credibility with investors. cut off the prospect The UK went from stable to negative on September 30th. The UK’s sovereign credit rating could be downgraded if fiscal pressures persist.

Pandemic is the root cause of global market woes

Huang argues that the contradiction between the UK’s interest rate hikes and massive tax cuts is actually a contradiction between monetary policy, including interest rates and the circulating money supply, set by the central bank, and the government’s fiscal policy. I believe it is. Determining taxes and spending. Likewise, it represents a conflict between controlling inflation and protecting jobs and the economy.

“Given that the world is currently in the midst of historically high inflation, it is an inescapable contradiction for most of the world’s major economies,” he said.

world bank September 15 report The risk of a global recession has increased.

“The world could be on the brink of a global recession in 2023, facing a series of financial crises with long-lasting damage to emerging market and developing economies,” the statement said.

Huang claims that COVID-19 is ultimately responsible for this global inflation. The spread of the virus has forced governments to implement the largest quantitative easing in human economic history, while factories have closed, the economy has stagnated, unemployment has risen and supply chains have collapsed.

“The fiscal policy contradictions facing the UK may not be safe from other countries,” he said. “Excessive quantitative easing during the pandemic was just a time-buy to postpone the economic crisis.”