The sun never sets and is almost made into a sunset
In 1990, Margaret Thatcher, the first female prime minister of the United Kingdom, announced her resignation, ending her 11-year term as prime minister. In 2022, Truss, who is also the female prime minister of the United Kingdom and was once known as the second "Iron Lady", just last Friday (10/21), after 45 days after becoming prime minister, embarrassingly announced his resignation, destined to become the shortest prime minister in British history...
While this melon is hot, the fish head also takes you to see, what did the British prime minister, who once almost caused global financial panic and can be called the biggest farce of the year, do?
01
The beginning of the farce - the super tax reduction plan
Truss, please note that it is not Tesla, one engaged in politics, the other engaged in science and technology, although they are destined to leave a name in history, but one is a historical joke, the other is a technological subversion, there is still a big difference ha~
As the fourth British Prime Minister in six years, Truss has shown his ambition to win more support for himself and allow him to stay in this position for a longer time when he took office in September. How to please it? Truss learned from many ZZ characters and used the simplest means - to distribute money.
The overall policy can be roughly divided into two parts, one is "tax reduction" and the other is "subsidy", and the whole plan costs about 45 billion pounds.
In fact, this trick is not new, in recent years, this means is called stimulating the economy, and there are not a few people who have really won over the people, especially in the United States, such as the two leaders of Bai and Te, have used policies that are larger and rougher than this scale.
But at this time and at the same time, Truss and his horse boy Kwarten should not have learned too well in economics, and actually introduced this policy at the most unwarranted time, which not only led to a global financial panic, but also almost made the country of the sun not set directly into the country of sunset.
02
Farce prolongs - the market shorts the UK
Why did Truss introduce this policy at the most unwarranted time? We can roughly judge from two perspectives.
First of all, Yutou just mentioned that in fact, such means of stimulating the short-term economy are very common, especially when YQ first broke out in 2020, almost all countries in the world used it, and the United Kingdom was also one of them. Long-term fiscal problems, combined with short-term stimulus, have brought the UK's current debt burden to its highest level since '08.
Originally wanted to repair the economy in 2021 and this year, you can let the debt problem take a little breather, but as a result, a series of Russia-Ukraine disputes, China's economic slowdown, the United States fierce interest rate hikes, etc., have caused a lot of impact on the economy, but as a result, you Truss came up and engaged in such a tax reduction drama, the market expectations for the future debt problem of the United Kingdom intensified, the ability to repay debt weakened, and the sense of distrust increased, began to sell British assets, resulting in the phenomenon that the stock and foreign exchange bond market began to fall.
Secondly, it is precisely at a time when the Bank of England is tightening, which exacerbates the seriousness of the problem. Like other European and American allies, the UK is currently facing quite serious inflation problems, inflation increased by 10.1% year-on-year in September, reaching a 40-year high, even if energy and food are removed, core inflation is more than 6%, so the current Bank of England also refers to the path of the Fed, adopting a tightening monetary policy of raising interest rates / reducing the balance sheet.
Back to Truss, the finances are already tight, and you want to spend so much money, what should you do? It seems that the only way to "borrow money" is to engage in, so there is a situation where the government borrows money = issues bonds - > the supply of British bonds increases.
At the same time, on the one hand, the Bank of England is engaged in balance sheet reduction = selling bonds to the market - > the supply of British bonds increases, on the other hand, raising interest rates = the market recovers funds - > the demand for bonds decreases. While supply increased, demand decreased, and from the law of supply and demand, it led to a decline in British gilts.
03
The problem spreads – the collapse of British pensions
The fall in British government bonds also led to the demise of an innocent institution – the British pension. Generally speaking, pension institutions will allocate funds in a safer place, that is, the national bond market, especially the national debt of the big country market such as the United Kingdom / the United States. In the context of an aging population, British pensions are burdened with increasing expenditures, but the interest rate on such government bonds is generally low, so most institutions will take one approach - leverage.
To put it simply, I originally bought 100 yuan of treasury bonds and could get 3% interest. With the same principal of 100 yuan, I add 2 times the leverage, borrow 200 yuan, buy the equivalent of 300 yuan worth of treasury bonds, you can get 9 yuan of interest, the overall income increases to 9% (not considering the lower borrowing cost), you can cover my pension expenses.
It seems to be a perfect solution, but the return and risk in the financial market always match each other, this kind of leverage, in the market all the way to enjoy upward or small fluctuations is not a big problem, but in the face of extreme market decline, there will be risks. To put it simply, the institutions that lend you money are not stupid, in order to avoid their own losses, when the price of the asset falls to a certain extent, they may ask you to replenish extra cash at a certain price or cut the position to sell the bond, otherwise they will help you cut the position and recover the funds lent to you. So when the market begins to fall sharply, liquidation events are common.
The British pension we just mentioned, because of holding too many positions in British government bonds, when the market falls, there is not enough cash to replenish, so it is forced to sell the relatively liquid assets on hand, such as British government bonds held, or European and American stock assets to cover the position, so there was a negative cycle of British government bonds falling - pension burst - pension selling bonds - British government bonds falling at that time, which also led to British government bonds becoming the worst target of Truss' policy decline (bond decline = bond yield upward), Of course, at that time, due to the sell-off of pensions, there were also shocks in the British/European/American stock markets.
Speaking of this, partners should be able to understand why such a common policy will cause such a big turmoil in the financial market, and the fish head side has also compiled a chart to summarize.
Because of the further work, the British pension may really have to stop, the Bank of England has to jump out to clean up the mess, saying that it will carry out a limited acquisition of British gilts within a certain period of time, and there is also a rare spectacle in history, the central bank tightens while easing to buy bonds.
04
The farce ends – an equally uneasy future
The farce lasted until October 14, when Truss publicly admitted that the policy had been wronged and would be revised, and replaced his former strongest ally, Chancellor of the Exchequer Kwarten, and the market's confidence in Britain began to recover, but at that time, many people began to speculate that Truss was not far from stepping down...
Perhaps also under strategic considerations, the originally very tough Truss officially resigned on 10/21, and the British Conservative Party will be re-elected to elect the next prime minister, and there are currently three who are relatively vocal, Truss's main opponent at that time, Sunak, former Prime Minister Johnson and House of Commons leader Mordaunt.
However, no matter who is elected, there is one problem to face, whether it is the energy crisis caused by the Russia-Ukraine issue, the high inflation problem, the economic downturn, or even the border dilemma and capital loss that are still left over from Brexit, each of which is quite a tricky problem for the authorities, and we will wait and see how long the next prime minister can last.
Like you, the stock is up and down~