Tras, who has a domineering personality, finally reaped the consequences and became the shortest-lived prime minister in British history. Some people say that after she came to power, she did something, that is, to send the queen away. The shortest-lived prime minister sent away the longest-lived queen, which is also a perfect "merit"!
In fact, Tras did one thing, which was to ignite the financial crisis in the UK .
This female prime minister, who claims to be a "fan girl" of Thatcher, mechanically copied the neoliberal policies of Thatcher's period and carried out tax cuts during the high inflation period, which eventually collapsed the British stocks, debts, and foreign exchange, and forced herself to resign.
British people "returned" to Tras so quickly. What exactly happened in the past 45 days?
Everyone should have an impression. When Tras and Indian candidates Sunak were running for election, the biggest difference was the issue of tax increase and tax reduction . Sunak advocated tax increase to control inflation , while Tras advocated tax reduction to stimulate economic growth.
At that time, Rong Ping also wrote an article saying that the economics of tax cuts in Tras was similar to Turkey Erdogan's interest rate cut to fight inflation. If these two countries can successfully experiment, traditional economics will be subverted, and the coffin boards of Adam Smith and Keynes will not be suppressed!
I didn’t expect the slap in the face to come so quickly. Turkey can make Erdogan to struggle like that because the Turkish people have been in a high-inflation economic environment for a long time, and have a set of methods and living habits to deal with high inflation. As a developed country, the UK does this. , especially tax cuts, quickly depreciate the pound, and the soaring treasury yields almost caused the UK’s pension to explode. The people’s pension money is about to be wasted, which is equivalent to shaking the foundation of Trass’s ruling. Leaving the throne is inevitable.
Let’s look at what did Tras do after he came to power?
First, facing Fed radical rate hike , the Bank of England followed the hike 50 basis points;
Second, fulfilling its campaign promises and launching the largest tax cut plan in the UK in half a century;
Third, facing financial turmoil , the Bank of England immediately launched mini QE (quantitative easing) at the end of September to start entering to rescue the market.
Due to high inflation, sharp interest rate hikes, coupled with the government's inappropriate fiscal expansion of tax cuts, the pound and British Treasury bonds collapsed at the end of September. The 10-year British bonds quickly rose from more than 3% to more than 4.5% in a few days. caused the pensions holding many long-term bonds to almost exploded.
is different from Turkey. The UK occupies an important position in the global financial market, and domestic financial investment is also very mature. People's pensions are invested in long-term government bonds and are linked to derivatives and leverage .
Tras introduced controversial large-scale tax cuts as soon as he came to power, causing fiscal deterioration, aggravated inflation and benefited the rich and offended the poor, causing the pound to plunge to a historical low, and pensions were on the verge of collapse, causing public grievances to rise.
So, at the end of September, the Bank of England promised to buy gold-edged bonds (UK Treasury bonds) with a total of 65 billion pounds and a maturity of more than 20 years to reduce long-term yields.
This creates a big wonder in financial history: the Ministry of Finance reduces the balance sheet in and sells treasury bonds in the hope of retrieving liquidity; while the Bank of England is releasing money and buying treasury bonds to raise liquidity for energy subsidies and tax cuts. Why does
fight left and right? This starts with the " printing money and tax reduction " created by Tras!
Tras not only imitated Mrs. Thatcher in appearance, but also almost copied the practices of Mrs. Thatcher's reign in policy, directly introducing the largest tax cut plan in half a century.
This includes lowering corporate taxes, maximum tax rates, basic income tax rates, significantly reducing stamp duty, etc. to boost the UK economy, which is about to fall into recession.In addition, they have also announced a package of " spending plan " to deal with the current energy crisis .
Tax cut + money issuing looks beautiful, but in fact, it is just a "carving a boat and seeking a sword". Because during the period of Mrs. Thatcher, the UK still had state-owned assets for sale, , but now the UK has no assets to sell to provide liquidity for "spend money", and can only realize by "printing money".
This directly caused the policies of the British Ministry of Finance and the central bank of to fight with each other, while closing and releasing. While the policy effect was greatly offset, it also made the inflation expectations of burst. Seeing that the new prime minister was going to "lent money to reduce taxes to the rich" and at the same time pushing up the already high inflation rate, the British financial market experienced an epic sharp drop, with the stock market, foreign exchange market and bond market three times.
In the first month after Tras took office, the total market value of the British stock and bond markets had evaporated by at least 300 billion pounds (about 2.3 trillion yuan), which did not include the huge losses in the pension market.
data shows that the scale of pension in the UK is nearly 4 trillion US dollars, ranking second in the world . The first is the United States, which has a pension of $35 trillion. About half of the UK pension is invested in UK Treasury bonds, about $2 trillion. The weighted average maturity period for UK debt stocks is as long as 15 years, compared with the United States only 6 to 7 years.
Currently, most pension funds in the UK adopt debt-driven investment strategy (LDI). It means buying a portion of the treasury bonds with the corresponding maturity, hedging the "liabilities" through "interest rate swaps", and then using the surplus money to invest. Normally, there is basically no risk in doing so, because after all, the national debt is related to the long-term stability of the country's destiny and generally there will be no major ups and downs.
But since the "tax cut plan" fabricated by the new prime minister was announced, market confidence has collapsed. because Tras is equivalent to opening an irreplaceable financial hole .
In just a few days, the yield on the UK 30-year Treasury bond soared by 120 basis points, while the yield on the UK 10-year Treasury bond soared by more than 300 basis points in a year. At the original interest rate level, the UK's pension was quite healthy, but this resulted in a terrifying amount of book losses.
So, almost losing the pension is the last straw that broke the back of Trass. The British think that Tras can't be allowed to play like this, otherwise they would have to lose all their money accumulated over decades.
Tras was a diplomatic person before, and she had never seen such a scene in ! Governing the country is not about making a show, nor is it about relying on one's passion. The courage of every man will only cause the country to fall into deeper disasters.
Why did "tax cuts" trigger such a terrifying financial crisis? It is because the scale of the tax cut plan of Tras is too large, and the UK has no corresponding assets to sell to fill this hole, and inflation is still rising sharply, and we can only rely on the expectation of "printing money" to reduce taxes. has broken the long-term interest rate stability of the pension market by .
As a floating interest rate payer, pensions are very sensitive to long-term floating interest rate liabilities. For the past 20 years, UK interest rates have indeed been falling all the way, and inflation has always been at extremely low levels. In this case, spending a floating interest rate and charging fixed interest income makes pensions profitable.
Since 2022, under the influence of the global central bank interest rate hike, UK interest rates have gradually risen, and domestic inflation has soared to a 40-year high. Especially after the British government announced the most radical tax cut plan in half a century, the British bond market caused a "bloody storm", that is, the yield on the 30-year treasury bonds and 10-year treasury bonds soared sharply, becoming the " black swan event " unexpected to the market.
As analysts pointed out, these strategies for pensions (LDIs) were basically implemented after the global financial crisis in 2008, and therefore these positions have never been tested during a period of rapid interest rates.
When interest rates rise rapidly, floating interest expenses far exceed the fixed income of long-term treasury bonds purchased by pensions, which means that their interest rate swaps have caused losses. But the tricky thing is that pensions provide treasury bond collateral to investment banks, prices plummeted as treasury yields soar.
In this case, the margin and collateral are quickly exhausted, and the pension needs to be paid back. This is the reason why the Bank of England entered the market to interfere in the purchase of long-term government bonds. It cannot cause the British pension to collapse, otherwise it will cause an unsolvable social crisis. Inflation was high, and the lives of the British people were already miserable. Now if the pension collapsed, there would be a big mess in the UK.
Analysts pointed out that is involved in pensions from countless British people, this crisis may have a greater impact on the market than the Lehman Brothers bankruptcy in 2008. If the UK Pension Regulatory Authority cannot coordinate the margin issue in the interest rate swap between pensions and investment banks in the short term, once the UK's long-term Treasury bond yield soars again, the asset value of pensions will suffer a sharp depreciation, and the liquidity crisis will break out again at any time.
Fortunately, the Bank of England finally decisively took action to save the market and pulled the pension back from the brink of death. The Bank of England can ease the pressure on collateral to pay back the mortgage by purchasing long-term Treasury bonds, push up its prices, and reduce pension losses.
If the Bank of England does not take action in time, the UK's long-term Treasury bond yield is likely to rise to 6% or even 7%, and pensions may face large-scale liquidation and bankruptcy. The pensions that countless British people rely on for survival will evaporate overnight, and the entire UK's financial system and even social system will fall into chaos.
In addition, the reasons why Tras stepped down so quickly were: changes every day, and the last bit of trust the people have in the government have been wiped out.
After the Queen's funeral, Tras couldn't wait to announce a tax cut, canceling the plan to raise the company's tax by 25%, canceling the maximum tax rate of 45%, and significantly reducing stamp duty. When she was proud of this flawless "Save Britain Plan", her own Chancellor Kuateng couldn't stand it anymore. If she really wanted to cut taxes so "ravely", the UK's fiscal revenue in the next four years would be reduced by 45 billion pounds, almost equivalent to the full-year military expenditure (the total British military expenditure in 2021 is US$59.2 billion).
It is obvious that Kwatten has some concerns about Tras' plan. Kuateng finally couldn't sit still and announced his resignation after 38 days of hard work as the Chancellor of the Exchequer. After Kauchang left, followed by Tras' 180-degree turn. She suddenly announced that the tax cut plan a few days ago did not count, and then increased the company tax from 19% to 25% .
Under the "torture" of Tras's day-to-day and wavering personality, Home Secretary Braverman could not hold on and announced his resignation a week later. He became the second senior official to resign after Kuateng, and this is the first time in the history of human politics.
Now I heard that former Prime Minister Johnson is coming back to run for Conservative Party leader, when will the British political farce be put to an end? "Training the British" will meet such a female prime minister who can make trouble, and such a group of politicians and clowns take turns to make shows, and they will probably collapse faster!
