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#AceNewsRoom With ‘Kindness & Wisdom’ Oct.02: 2022 @acenewsservices
Editor says as UK begins its first Tory Conference in Birmingham it already has a flavor of disaster looming with many MP’s refusing to attend here’s the reasons why!
Liz Truss resists calls for earlier tax plans assessment according to BBC Politics News
Prime Minister Liz Truss is resisting calls to bring forward the publication of the independent fiscal watchdog’s assessment of her tax plans.
The PM said she was “committed” to publishing the Office for Budget Responsibility forecast on 23 November, the same day the chancellor is due to set out further economic plans.
Some Conservative MPs want this sooner to reassure financial markets.
The Treasury argues it should wait until additional changes are announced.
These “supply side” changes to stimulate growth are expected to include measures in eight areas – business regulation, agriculture, housing and planning, immigration, mobile and broadband, financial services, childcare, and energy.
- Liz Truss’s path to regain market credibility
- UK not in recession, new figures suggest
- Market reaction to tax cuts surprising – minister
Last week, Chancellor Kwasi Kwarteng set out some of the government’s tax and spending plans – including support for people facing high energy bills and a surprise announcement that it would scrap the 45% highest tax band for high earners.
However, his mini-budget was not accompanied by a forecast from the OBR, something which helped to fuel market turmoil.
In the days following the announcement, the pound slumped against the dollar and the Bank of England was forced to spend £65bn to protect pension funds.
After a meeting between Ms Truss, Mr Kwarteng and the OBR on Friday morning, the government confirmed the rest of its economic plans would be published on 23 November, alongside an OBR forecast.
The Treasury will receive the OBR’s first draft on 7 October, but that will not be made public.
Some of Ms Truss’s own MPs have raised concerns about the timetable.
Leading members of the Office of Budget Responsibility arriving at 10 Downing Street for a rare meeting with the prime minister
Waveney MP Peter Aldous said the timing of last Friday’s plan had been “hopelessly wrong”, and the rest of the details should be brought forward to October.
Sir Geoffrey Clifton-Brown said moving the date forward would give international markets and his constituents “reassurance”.
Elsewhere Liberal Democrat leader Sir Ed Davey argued that the government, by waiting until 23 November, was allowing the UK economy to “fly blind” for two months.
“Families and businesses can’t afford to wait any longer for this government to fix their botched, unfair budget,” he said.
Defending the decision not to publish an OBR forecast after the mini-Budget last Friday, Ms Truss said she had wanted to announce support for energy bills quickly and that “in that timescale” there could not be a full OBR forecast.
What is the Office for Budget Responsibility?The Office for Budget Responsibility (OBR) is the independent watchdog for the government’s finances. It usually produces economic forecasts twice a year, to accompany each autumn budget and spring statement. It scrutinises government plans, to increase taxes or borrowing for example, and predicts what the likely impact on the overall economy will be.These forecasts are so important because a strong one gives investors confidence to put money into the UK economy – whereas a weak one is likely to have the opposite effect.The government can request forecasts from the OBR at any time to get independent advice on big moves.But it did not take the OBR up on its offer ahead of last week’s mini-budget. This is thought to have undermined confidence in the markets.This led to the pound dropping to its lowest rate against the dollar in 37 years on Monday, before returning to its previous level.In recent days, the Conservatives have posted some of their worst opinion poll ratings in more than 20 years.A poll published on Thursday by Survation put the party on 28%, more than 21 points behind Labour, while a separate survey by YouGov put the Tories on 21%, 33 points adrift. Labour’s shadow business secretary Jonathan Reynolds said ministers should “get back to Parliament, revoke the changes, and start again to try and rebuild confidence”.And Conservative MP Martin Vickers urged the prime minister not to scrap the 45p tax rate and the bankers’ bonus cap, describing the move as “a political own goal”. However, another Tory backbencher, Andrea Leadsom, said the mini-budget was “unashamedly pro-growth”, and that the markets were “wrong to be jittery” about the changes.
The world is flirting with another global financial crisis, and the next few weeks are key – ABC News
It’s hard to overstate the magnitude of the financial trouble Britain and, because of its financial heft, the world found itself in this week.
We came within inches of “global financial crisis mark 2”. That’s not hyperbole.
Towards the end of 2008, it was clear many Wall Street investment banks were on the brink of collapse.
They were sitting on tens of billions of dollars’ worth of rubbish assets – mortgage-backed securities attached to properties plummeting in value.
A credit crunch was sparked when the US government allowed Lehman Brothers to collapse. It was sitting on a lot of these worthless assets.
Suddenly, it was unclear who could afford to repay loans and who couldn’t.
We’ve just flirted with a scenario of similar magnitude.
The problem now is, well, the flirtation is not over.
Comedy of errors
Liz Truss – Boris Johnson’s replacement as British prime minister – inherited an economy at risk of entering a protracted and deep recession.
Truss delivered a “mini-budget” last week which offered up lots more government spending and the biggest package of tax cuts in 50 years to help stimulate the economy.
Great, right? Well, not so much. Financial markets asked an obvious question in response: “how are you going to pay for this?”, when the UK’s budget deficit (or net borrowing) is already in the hundreds of billions of pounds.
The BBC reported conservative MPs walking the corridors “in shock” after the mini-budget was handed down.
The ultimate response from the money markets was a vote of no confidence in the fiscal package. The bond market “sold off”. Bond prices in the fixed income market plummeted.UK’s Liz Truss stands firm on pilloried fiscal plan
As bond prices fall, yields rise. It’s really not necessary to understand the bond market machinations here, but it is important to understand the next point.
That is, for Britain’s pension scheme to work, or continue as a going concern, interest rates can’t rise too high too quickly — which is what happened.
The funds found themselves unable to pay pensions because they were losing too much money on their investments.
To stop this, the Bank of England came in to buy up bonds on an enormous scale to increase the price of bonds and lower the interest rates on those bonds.
“To achieve this, the Bank will carry out temporary purchases of long-dated UK government bonds from September 28. The purpose of these purchases will be to restore orderly market conditions,” the Bank of England said.
“The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury.”The Bank of England has been buying up bonds. (AP: Kirsty Wigglesworth)none
But here’s the killer line.
“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability.”
What the Bank of England was suggesting, according to former London City trader Henry Jennings, is that when the bond market moved violently against these pension funds, they were at risk of being placed into margin calls.
That is, many funds had borrowed money to make more money. They were heavily in debt to enhance their returns.
They were about to be asked to “pay up”.
If they were asked to pay up, they would have been forced into liquidating their assets, which he says would have led to a financial markets “death spiral”.
The sheer weight of global assets being sold off would have, in Jennings’ opinion, led to a global “confidence crisis”.
Problem not going away
The Bank of England bailout of Britain’s pension schemes is limited.
“These [bond] purchases will be strictly time limited,” the BofE said. “They are intended to tackle a specific problem in the long-dated government bond market. Auctions will take place from today until 14 October.”
So, what happens when they stop buying gilts, or British bonds?
The chief economist of the National Australia Bank says the forces that led to Britain’s financial system edging to towards the brink remain firmly in place.NAB economist Alan Oster.(ABC News: Sean Warren)none
“Markets are getting a bit worried,” Alan Oster says.
He says interest rates in Britain will keep climbing, and may do so quite aggressively in the coming months.
“[Markets] are talking – well, it’s frightening, they’re starting off from a cash rate of 2-ish per cent and they’re talking about a 1.25 per cent or 1.5 per cent interest rate increase [at the next Bank of England meeting]”.
“It’s extraordinary and of course the pound is being absolutely killed.”
In other words, the problem facing the pension fund scheme is set to return.
It’s heavy stuff
So, let’s just do a quick stop-and-check at this point, because it’s heavy stuff.
The UK is still at risk from a financial crisis because a major investment scheme remains vulnerable to a bond market that’s still at risk of plummeting due to the UK’s economic woes (in part created by a dire mini-budget).
This is all being reflected in a recent collapse of the pound.
A financial crisis in the UK would, analysts say, lead to a global economic rout.
Is Australia immune?
The short answer is no.
The Australian dollar is hovering around two-year lows against the greenback, and the stock market is down 15 per cent from peak to trough.
We’re inching towards a share “bear market”.
This has obvious implication for those in and approaching retirement.
A destabilisation of the global financial system, more broadly though, would produce the same shock waves as 2008 and 2009.
It leads to higher unemployment and a recession.
The problem this time around is that the Australian government, and indeed the Reserve Bank, are in no position to engage in extraordinary economic stimulus measures.
But … so far so good
However, it seems the majority of Australians, right now, have the financial capacity to continue on in a relatively normal fashion.
Australian retail turnover rose 0.6 per cent in August, according to Retail Trade figures released today by the Australian Bureau of Statistics earlier this week.
The August increase was the eighth consecutive rise and follows a 1.3 per cent rise in July and a 0.2 per cent rise in June.
“This month’s rise was driven by the combined increase in food related industries, with cafes, restaurants and takeaway food services up 1.3 per cent and food retailing up 1.1 per cent,” Ben Dorber, head of retail statistics at the ABS, said.
The dark cost-of-living clouds hanging over millions of Australians is “being balanced by people saying, ‘well, I’m not going to lose my job’ “, NAB chief economist Alan Oster says.
“The economy is doing really well.”
But, and that’s a big but, he says ominously, the “next four weeks will be interesting”.
That’s a reference to the fact that the bulk of already-announced Reserve Bank interest rates hikes will hit bank accounts over the next couple of months.
It’s unclear to most observers how, exactly, this would damage the Australian economy.
Work is already underway though to put policy makers in a better position to make the right calls when it come to pulling the levers.
The ABS, for example, is now delivering monthly inflation or cost of living data.Inflation : ABS releases monthly CPI preliminary data
The first monthly Consumer Price Index (CPI) indicator rose 7.0 per cent in the year to July and 6.8 per cent to August.
The largest contributors, in the 12 months to August, were new dwelling construction, up 20.7 per cent, and automotive fuel, up 15.0 per cent.
Now the Reserve Bank is in a better, or timelier, position to see how its policy tightening is influencing prices in the economy.
This, in practice, is meant to avoid hiking interest rates too far.
The RBA meets on Tuesday.
At the moment it’s a coin toss as to whether the bank raises its cash rate target by 0.25 or 0.5 percentage points.
How serious is all this?
Naturally, with any major financial event, the question is: do I need to worry about this?
The answer is that you need to keep watching this story unfold.
AMP’s chief economist, Shane Oliver, suggests while the Bank of England’s short-term effort to bring back the UK financial system from the brink has worked, the country’s financial system is set to go right back there again soon.
“The Bank of England’s intervention to calm the gilt market (which was threatening financial problems for UK pension funds) by buying bonds (ie restarting QE) has helped calm things – directly in the UK and indirectly elsewhere by showing that authorities will still intervene in a crisis,” Dr Oliver said.AMP Capital chief economist Shane Oliver.(John Gunn.)none
“Unfortunately, the return to QE [bond buying] may just add to inflationary pressures if it has to be sustained for long, which may necessitate an even higher interest rate hike when the BoE next meets in early November with many talking about a 1.25 per cent hike, which leaves the BoE in the silly position of easing and tightening at the same time.”
So, the options are that the Bank of England keeps coming to the rescue of the UK financial system with the risk of exacerbating inflation which will lead to much higher interest rates, or allow the market to take over, and risk a full-blown financial crisis when the bond market collapses again.
Australia seems to be in a reasonable position now to manage a financial shock, but it’s unclear whether that will still be the case in just a few weeks’ time.
Huge risks remain.
Printing trillions of dollars of money, globally, during the pandemic to support the global economy was always fraught with risk.
As it stands we are unable to remove that economic support without the whole system collapsing, but we need to remove it before we create even bigger economic problems.
It’s an extremely uncomfortable position to be in.
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