Zhitong Finance APP learned that former U.S. Treasury Secretary Lawrence Summers criticized the economic policies adopted by British Prime Minister Tras for being "naive and wishful" and said that these policies are creating conditions for the pound to fall below parity against the dollar.
Sumers said: "I'm sorry to say that, but I think the UK's behavior is a bit like an emerging market turning itself into a sinking market." "From Brexit , to the Bank of England lag far behind the situation, and to the current fiscal policies, I think the UK will be remembered for the worst macroeconomic policies it has been implemented for a long time."
The government led by the new Prime Minister Trass on Friday introduced the most aggressive tax cuts in the UK since 1972 to boost the long-term growth potential of the UK economy. The relevant tax cuts are worth up to £45 billion, including the cancellation of the plan to raise corporate tax to 25%, the cancellation of the maximum tax rate of 45%, and significant cuts in stamp duty, etc. It is reported that the scale of this tax cut exceeded the tax cuts introduced during the reign of Mrs. Thatcher in 1988, and was the largest in half a century.
tax cuts will cost the UK Treasury about £161 billion in the next five years, and the UK government’s subsidy for household energy bills will cost £60 billion in the next six months. In order to raise funds to support its stimulus plan, the British government plans to issue 193.9 billion pounds of government bonds this fiscal year, 60 billion pounds more than the original plan, exceeding the market's previous expectations.
However, additional fiscal stimulus will complicate the problems faced by the Bank of England, as policymakers take steps to curb inflation pressures, will support consumer demand in turn stimulate inflation. Some traders are concerned that the move could undermine the Bank of England’s efforts to curb inflation.
Investors are worried that Trass' tax cuts will only bring a brief "sugar rush" to the UK economy and lead to debt inflation and spiraling upwards, ultimately leading to an economic collapse without any lasting improvements to long-term growth. Long before the UK government formally introduced tax cuts, former Bank of England policymakers warned that Tras's decision to cut taxes regardless of the situation could push Britain into the pound crisis.
The market's response to this tax cut plan was directly reflected in the sharp drop in the pound. On Friday, the pound sterling exchange rate fell below 1.10 for the first time since 1985, falling more than 3% during the day, the biggest drop in two and a half years; as of press time, the pound sterling exchange rate against the US dollar had fallen to 1.09.
Sumers said: "I wouldn't be surprised if the current trend continues and the pound will eventually fall below par against the dollar."
In addition, Summers also mentioned the dangers brought by the surge in the US dollar, saying that this has increased inflationary pressures in countries around the world and the pressures of overseas borrowers who issue dollar bonds. He also said that the appreciation of the US dollar may continue, and the Fed's turn to a more radical rate hike path has driven the appreciation of the US dollar.
Sumers said: "This will be a problem that has accompanied us for a while. Countries will have to adapt to the very strong dollar, which will complicate the macroeconomic management of many economies."
Regarding the yen, Summers believes that the Japanese authorities' intervention to support the yen is not the right move. "When you intervene against the direction of trends and monetary policy, these interventions may both create opportunities for speculators and may really effectively change the exchange rate trend," he said. "
Summers also pointed out that tightening the U.S. fiscal policy may help because it can relieve the Fed's current burden on domestic inflation. He said that if the U.S. government emphasizes more fiscal policy than monetary policy, it will create a policy environment with lower interest rates and may not put such upward pressure on the dollar.
As for the Fed's approach, Summers reiterated his support for his hawkish stance on Wednesday, noting that Fed Chairman Powell has become increasingly aware that the necessary medicines to fight inflation include economic recession.
