Financial turmoil in Western markets


If you follow the markets, you’ve heard about the recent financial crisis in the UK and the predicted doom in the US. The UK is a smaller country than the US, but generally speaking the UK has one of the strongest financial systems in the developed world. Moreover, the US and UK are the most prominent examples of market-based capitalism in the entire world.

But the problem is ongoing.

After UK Finance Minister Kwasi Kwarten announced a string of tax cuts last month, he and Prime Minister Liz Truss may have cut short their careers in addition to fueling budget chaos with wayward domestic policies. It seems that.

In an unusual move, the Bank of England (BoE) warned of a dire situation. According to the BBC, “Bank of England warnings about financial stability are rare and suggest that threats to the financial system cannot be dismissed with confidence. As a result, it is even rarer to suggest that some of the blame for the turmoil may lie on government doors, despite measures taken by banks and the Treasury on Monday to calm investors. , government borrowing costs rose sharply, forcing banks to intervene.”

Additional reports by the BBC have revealed further concerns. The government appears to have been “pressured” by MPs and forced to “make a U-turn on plans to abolish the top rate of income tax”.

The Fiscal Institute has warned that the government sector could make “large and painful cuts” of up to £60bn a year to balance the books when Mr Kwarteng unveils his economic plan on October 31. .

In other words, the strategy was so misunderstood that a complete reversal had to take place.

With the UK economy already dealing with record inflation, it is well known that there are fundamental problems with confidence in the current leadership. Never mind the fact that the British pound is facing a dramatic tailwind.

The London-based The Times and The Sunday Times reported that “The Bank of England has announced an emergency intervention in the UK financial market to avoid a material risk to the UK’s financial stability.” In a highly unusual move, the BoE said it would start buying long-term government bonds to deal with surging borrowing costs.

The Times continued: The BOJ also said it would postpone a long-standing plan to start phasing out quantitative easing, which was due to begin next week. It follows days of market turmoil that have pushed up the cost of government borrowing and mortgages. Pension funds are under great pressure. …the bank said the Treasury Department would immediately start buying long-term gold coins, compensating it for any losses. “

Low interest rates are also a factor. A prolonged period of low interest rates has created significant vulnerability in the UK pension fund market. The UK pension fund market is sticking to persistent metrics, especially in a strategy called liability-driven investment (LDI).

As Bloomberg reported, pensions “manage risk using liability-driven investment (LDI), where pension fund managers calculate the duration of future debt (which ) and hold fixed income assets of the same duration.”

Will the Federal Reserve make more mistakes?

Meanwhile, the United States is in trouble. Treasury buyers are pulling back, and rising interest rates are disrupting the housing market.

Zoltan Pozser of Credit Suisse Group said in a recent live episode of Bloomberg’s podcast “Odd Rot”: Intervention by the private sector instead of the public sector at a time when inflation is more uncertain than ever. We are asking the private sector to remove all these treasuries pushing back into the system without glitches or huge premiums. “

The Federal Reserve made a grave mistake in believing inflation was temporary and took insult to injury when policymakers failed to act when inflation in America apparently went through the roof. I just added it.

Mohammed El-Erian, Chief Economic Advisor to Allianz, recently said: by the Federal Reserve Board.

The Fed’s third mistake could be a tipping point. Homes are still stressful. The latest edition of the Burns Home Value Index, which measures trends in home prices for all homes (new and resale) in 133 markets, saw significant declines last month on the West Coast, particularly in California. In Los Angeles it fell 11. Percent from peak. San Francisco is down 11% from his peak. San Diego is down 9% from its peak. San Jose is down 8% from its peak. In Orange County, the value decreased 7% from its peak.

With geopolitical tensions in serious trouble and interest rates continuing to rise, now is not the time to step on the brakes and step in to pick up slack in the sluggish private market.

Housing aside, it looks like the same thing that happened in the UK could happen in the US if policy makers aren’t careful. let’s hope

Meanwhile, the Biden administration is more focused than ever on social justice democracy, misprinting banknotes, and sending large checks to Ukraine.

This is not a recipe for stable fiscal policy.

Views expressed in this article are those of the author and do not necessarily reflect those of The Epoch Times.

Chadwick Hagan


Chadwick Hagan is an investor, entrepreneur, author and columnist. He is a founder and director of numerous companies and a partner in an investment bank. Hagan Capital When Eaton Square LimitedHe is a Fellow of the Royal Society of Arts and is based in Atlanta and London.