‘Dear, oh dear. Anyway …’

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Convergence real yields US-UK

Green: Real yields on 30-year inflation loan UK

Gold: Real yields on 30-year inflation loan US


Crispin Blunt is the first Conservative MP to think Prime Minister Liz Truss should leave. According to him, Truss cannot survive the current crisis, he says it is a matter of finding a successor. Meanwhile, another Conservative MP has called Truss a libertarian jihadist, engaged in an ultra-free-market experiment in the British economy. According to new minister Jeremy Hunt (Kwasi Kwarteng’s replacement), Truss will remain at the helm, but the moment when he or she is no longer in charge of it is dangerously approaching.

Truss was compared to Margaret Thatcher when she took office. The difference, of course, was that she came up with a substantial Keynesian investment programme (combined with tax cuts and a ceiling on energy prices), but another big difference between Truss and Thatcher is that Thatcher became famous, among other things, for her speech on 10 October 1980. Back then, Thatcher refused to make a 180-degree turn, something that Truss did by adjusting more and more of her reforms under public pressure. It confirmed Margaret Thatcher’s nickname (Iron Lady). Thatcher received a five-minute standing ovation in 1980, Truss gets a knife in the back from Conservative MPs.

Even the new British king seems to be dropping Truss. Last week, she had her first audience with Charles. As Truss greeted Charles with ‘Your Majesty, Charles replied with ‘So you’ve come back again’. Truss then replied with ‘It’s a great pleasure, after which the King replied ‘Dear, oh dear. Anyway …’.

Incidentally, Truss is not the only Briton to turn. Central bank governor Andrew Bailey also has to choose between monetary policy and financial stability. Bailey indicated that the buyback programme launched after Truss’ reform plans would not be extended. Had that buyback programme not been in place, several UK pension funds would now be bankrupt. Last Friday, that programme ended. According to Bailey, it is not possible to start QT and raise interest rates on the one hand and buy up UK government bonds on the other. But Bailey also seems to be struggling to stick to this view. Bank of England staff leaked to the Financial Times that the BoE would be willing to extend the deadline, all depending on market conditions. This obviously does not help with a rising systemic crisis. There are now MPs who hold the BoE responsible for the current crisis. If Bailey does go ahead with the buyout on Monday, the BoE’s credibility will further decline. Bail’s comment is reminiscent of the letter the BoE sent to parliament that Northern Rock should not be bailed out because of the moral hazard problem. A few days later, Northern Rock was bailed out.

Now the dilemma is that under the British Conservatives’ rule book, Truss cannot be set aside for the time being. That cannot happen until September 2023 at the earliest. Now, of course, she can resign herself and the Conservatives can also change their regulations. For now, the UK looks more and more like a submerging market, with the accompanying volatility in interest rates and the pound.

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