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Ask HN: What Is Happening in the UK?

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Re: Ask HN: What Is Happening in the UK?

#111

Post by stephen_g »

a3w wrote: post #34
yuvadam wrote: post #12

Led by the US, the entire world is in a debt spiral, and just like many of the systems that sustain modern civilization, the global economy itself is in various stages of unraveling from its unsustainable path [1] [1] - https://lookingglasseducation.com/whats-a-debt-spiral-and-is...

A little to coarse, since OP asked about the UK. But Obama already acknowledged that the US will never pay back all their debt, "even if they get 10% GDP increase per year for every single year" if I am not mistaken about that non-verbatim quote.

Monetarily sovereign countries like the US, UK, Australia, Japan etc. (but not Euro using countries because they can’t control their own currency) don’t really have to. They can just keep rolling things over for as long as they want. If private markets don’t want to buy bonds (they will tend to though because it’s basically risk free), the central bank can.

It’s not the money that’s the issue - that’s an abstract, invented thing. The limits are inflation, natural resources and available labour.

Re: Ask HN: What Is Happening in the UK?

#112

Post by zarzavat »

thewarrior wrote: post #16

The UK imports large amounts of energy and other things essential to its prosperity. The UK has a current account deficit which means it does not have enough of the dollar to cover for its imports. It has solved this problem over the years by borrowing and becoming a haven for investment to cover up the shortfall. Now we have a bat shit government that says we need to lower taxes and borrow a boat load of money to ti…

> One way to stop this is to raise interest rates and pull pounds out of circulation but the government is terrified of popping the real estate bubble.

The government doesn’t get to decide this. Interest rates are set by the Bank of England and will rise as a result of the government’s decisions. So it’s more accurate to say that the government doesn’t care about popping the real estate bubble or is delusional about the effects of their policies.

Re: Ask HN: What Is Happening in the UK?

#113

Post by candiodari »

scrlk wrote: post #58

The Bank of England's announcement that they will restart QE (a.k.a. money printer goes brrr) on a "temporary basis" was driven off the back of UK pension funds facing massive margin calls due to the spike in gilt yields. There's a good article in the Financial Times that explains the mechanics behind it ("LDI: the better mousetrap that almost broke the UK"): https://www.ft.com/content/f4a728a5-0179-48bd-b292-f48e30f…

A cynic would say this is by design. The government created those funds to avoid paying pensions, and spend the money themselves (pension funds are designed to let the government spend all the money they collect, increasing government debt. They do not have the choice what to invest in), and this is merely a continuation of that policy. That these funds are going to crash is a certainty, they're designed to delay it as much as possible. They have now achieved that.

When it became clear that having enormous debt inevitably causes instability when people doubt the government's ability to pay this back, pension funds became responsible for not just funding the government, but also guaranteeing the ability of the government to loan more money. This requires leveraging their investment, and THAT is what's causing the crash here, that leverage. They've effectively guaranteed N times the government_debt, and that N is what became "big". That guarantee doesn't help pension funds, it keeps government debt payments low. The market is saying they don't want to lend to this government, and the government (not the PM, the rules for pension funds that already exist) is trying to force the availability of cheap debt. Of course, not using their own money or budget, but using pension money of ordinary people. This became out to be so incredibly expensive that even pension funds were in danger of not being able to pay for it, so the BoE lowered government funding costs using money printing, against their policy.

Pensions the way they were introduced after WW2 in the majority of places are utterly unsustainable, and the UK is no exception. If you calculate what a person needs to have an acceptable pension at the yields we've seen, you get to about a million pounds per person (2% drawdown, 2% investment yield, for 30 years, giving a person 25k GBP per year after tax = roughly a million. And that's generous, assuming interest rates go up and stay up, on average, above 4% without dropping average stock market returns below 4%, and with dropping inflation to ZERO 0%, because at 2% over 30 years, it's of course more, if you want the standard "parity" investment to work out). Pension funds actually have about 50k per person, not even 2 years worth of pension.

Pension funds are going to crash, obviously, and what Truss and Kwarteng are trying isn't the cause of that. In fact, huge inflation ought to delay the point these funds will crash. It's a matter of when, not if, and not a question "who is in office when it happens". I actually think their odds of preventing a pension fund collapse during their term are pretty good.

The government is back to the 1920s: they've found a way to force the government budget to be money printed by threatening pensioners livelihoods, and thereby can now effectively spend infinite money. This will of course cause massive inflation, but it will as was demonstrated, save pension funds. It won't, of course, help pensioners. They'll lose big in effective purchasing power. And that is exactly the point of this policy.

Re: Ask HN: What Is Happening in the UK?

#114

Post by chimprich »

bjornsing wrote: post #39
pyb wrote: post #2

In a few words, PM Truss's first economic measures indicate that she's ideologically-driven and has no idea what she's doing. Namely, cutting taxes for the rich in hope that maybe some economic boost will "trickle-down" to the middle class and the poor. This idea is utterly discredited in economic circles. The UK central bank, the BoE, is forced to take measures to counteract what Truss and her government are doing !…

I think the old adage “correlation is not causation” applies somewhat. It’s probably true that the market got worried about the UKs ability to service its long term debt, but Truss’ announcement came in the middle of the worst bear market in bonds for well over a decade. Also, e.g. the Swedish crown (SEK) has lost about as much against the US dollar as the pound has, completely unrelated to Truss and her announcement…

Sorry, but that's nonsense. The market dropped spectacularly during the new chancellor's not-a-budget-honestly speech. You can't get a better smoking gun than that.

> but Truss’ announcement came in the middle of the worst bear market in bonds for well over a decade

Yes, and she chose to do that. It was amazingly irresponsible. The market response was entirely predictable.

Re: Ask HN: What Is Happening in the UK?

#115

Post by EliRivers »

fffobar wrote: post #67

Where is that market meltdown? The FTSE 100 is down a whopping 1% today, and down 3% over the last 5 days. Looks absolutely normal to me.

The FTSE100 does well when the pound drops against the dollar, as about 70% of revenues generated by FTSE100 companies comes from outside the UK. When the pound drops, their revenues (measured in pounds, at least) go up.

The FTSE250 is down 7% over 5 days.

Re: Ask HN: What Is Happening in the UK?

#116

Post by chimprich »

fffobar wrote: post #67

Where is that market meltdown? The FTSE 100 is down a whopping 1% today, and down 3% over the last 5 days. Looks absolutely normal to me.

The FTSE 100 is mainly made up of international companies, so is somewhat insulated from the UK economy. It's still taking a hit though.

Re: Ask HN: What Is Happening in the UK?

#117

Post by SilverBirch »

sixhobbits wrote: post #41

If you look at the graphs for GBPUSD and EURUSD on year timeframes they are very similar. I am not an economist but to me it seems like the various Europe crises around energy, war, covid etc have the main effect and the media is just focusing on UK specific politics and monetary policy because it changed recently and gets clicks.

The real story here isn't just currency though, it's government debt, and UK 10 year gilt yields have double in the last 2 months and are now being stabilized by the Bank of England.

Re: Ask HN: What Is Happening in the UK?

#118

Post by roenxi »

ceejayoz wrote: post #105
roenxi wrote: post #96

Earlier quoted context omitted.

Are you potentially not a creditor? I think the term here is 'distinction without a difference'. If you lend the US enough money for a sandwich, you should expect not to get a sandwichworth of money back. What you call that legally is not that interesting, I suspect, to the people were lending the money.

The creditors all get paid. The US has always made its debt payments. New loans get taken out while that happens. Non-$0 debt load, but no defaults. The only time the US ever paid off “all its debt” was during 1835-1836. One year out of more than 200.

It doesn't matter what happened to creditors centuries ago. As it stands right now it is inconceivable that the US could or will pay off all its present and future creditors in real terms. Someone has lost a lot of money (presumably China and Japan). How could the US pay them back without resorting to fantasy? The debts are too high and the US economy is not big enough for any strategy to be politically feasible. Even coming up with a serious scenario where the US tries to pay down its debts is hard. It is likely that they are going to keep running up debts until they can't pay the interest any more, then default.

The best outcome the US can achieve is semantic games where they pretend that giving people back less than was borrowed is somehow reasonable.

Re: Ask HN: What Is Happening in the UK?

#119

Post by chimprich »

icare_1er wrote: post #8

Genuine question: why are markets disapproving of the economics policy decided by a ... right-wing governement ? I though markets reacted negatively to socialist governments getting into power, not the opposite.

Markets react badly to uncertainty. The incoming administration has announced huge tax cuts without explaining how they are going to pay for it.

Either there is no realistic plan or the ministers involved have been too incompetent to explain it. Neither explanation inspires confidence.

Re: Ask HN: What Is Happening in the UK?

#120

Post by kypro »

If a government runs a fiscal deficit then to balance their books they need to borrow additional funds from the market.

If your fiscal plan doesn't make sense market lenders may not be willing to lend to you or will at least expect a higher interest rate to compensate for their risks.

The Conservative party in the UK has just elected a new PM who has announced a fiscal plan which doesn't add up - tax cuts financed with borrowing.

Worse still the PM is doing this in an effort to boost growth which only adds to current inflationary pressures at a time where inflation is far too high.

Given this the market now believes the central bank will need to be much more aggressive in their fight against inflation and raise their base rate much higher.

In addition to this the market is also sceptical of the governments fiscal policy and is demanding a higher risk-premium to lend money.

The result is sky rocketing borrowing costs for UK consumers, businesses and the UK government.

Pension funds are one of the largest holders of government bonds as they're typically seen as very safe investments (especially within developed markets).

But of course every investment still has risks and when those risks are underestimated it can leave a lot of investors on the wrong side of the trade very quickly.

As large holders of government bonds many pension funds found themselves in this position and my understanding is that some have been on the verge of blowing up in recent days.

Obviously were pension funds to blow up on mass this would have all kinds of negative knock-on effects for the economy.

It would also mean many of these funds would become forced sellers of bonds and this forced selling would have added even more volatility and instability to an already volatile market.

Basically the UK was at risk of at risk of a GFC style blow-up so to restore stability the BoE was forced to step in yesterday to buy bonds that no one in the market wants to own right now.

Interestingly today the PM is doubling down on her fiscal policy. But then she has some fairly controversial economic views, including the belief that higher interest rates is a good thing.

In my opinion she's too naive and ideologically driven to understand what she's doing. At the end of the day the BoE can't make a broken fiscal policy work, they can only buy time.

If the government doesn't reverse course the UK economy is probably going to implode, but as I say we have a PM so ideologically driven that she may actually see this as a good thing - it's just free-market capitalism cleaning out the weak-hands, etc.

Although it's probably electoral suicide my guess is the Conservative party will need to step in at some point and force her to back down in one way or another. If they don't it's hard to see the public will forgive them for this anytime soon. Especially considering many vote for the Conservative party because they're seen as the party of fiscal responsibility.

Either way as a mortgage holder who's probably going to default on their mortgage due to all of this I don't expect anyone to step in and help me =) This is my mistake, not the governments. And I'm just a pleb with a family, not a pension fund.

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