Liz Truss and Rachel Reeves have a lot in common. I never thought I would say that, but I really think they have. Both are the undoubted victims of UK government gilt crises created by the Bank of England.
I know it is popular to say that Liz Truss crashed the economy in September 2022, and let me make it clear that I think that she was actually incompetent. She did, after all, let Kwasi Kwarteng present a ridiculous and uncosted budget during that month. But the crash that happened thereafter was not her fault.
That crash happened because the day before that Budget was presented to Parliament, the Bank of England had announced the first stage of it quantitative tightening program. As a result, it was stated that the Bank would sell £80 billion of government bonds into financial markets in the following year, and none of the proceeds of sale would be used to fund the government spending. Instead, the aim was to drain the private sector of funds, supposedly to reduce the risk of inflation.
The consequence was, however, the so-called LDI crisis. That happened because this dramatic change in policy from the Bank of England caught out all those pension funds, in particular, who had invested in government bonds assuming a stable market, which no longer existed. The consequence was that those funds had an immediate liquidity crisis. Far from undertaking quantitive tightening, the Bank of England did, instead, have to put in place an emergency quantitative easing programme to keep major financial institutions from insolvency.
You can argue that the pension funds should not have pursued the policies they did, and I would have some sympathy.
But a much more effective argument would be one that suggested the Bank of England should have:
- understood what it was doing,
- given prior warning of its intentions, and
- should have proceeded with vastly more caution so that markets were not disrupted by its reckless actions.
Bailey survived that debacle, even though he should not have done so. However incompetent Truss and Kwarteng were, Bailey was very much worse, and he was the person who should have really paid the price for what happened.
Now Bailey has created another financial crisis, this time for Rachel Reeves, on the back of which others are now riding. This one is also easier to understand. Rachel Reeves has the simultaneous goals of delivering growth and balanced budgets. To achieve that, she needs low interest rates and a ready market for the government bonds that she wishes to sell, having changed the fiscal rule to ensure that gilt sales to fund investment will not upset her plans.
So, what has Bailey done? He and his reckless colleagues at the Bank agreed to continue with quantitative tightening, planning to sell pointlessly £100 billion worth of bonds in financial markets this year, realising considerable losers whilst doing so. Their sole aim in doing so is to remove funds from markets that might otherwise be used for productive purposes by funding investment. In addition, this plan was intended to push interest rates up to supposedly control inflation. There has been no perceived impact on inflation, and nor will there be, but the interest rate rises have happened and are exactly what has created Rachel Reeves' crisis.
Rachel Reeves is not a good chancellor. It will take quite extraordinary on her part for anyone to change their mind about that. There are very good reasons to question her competence. However, the current crisis is not even remotely of her making, whatever some right-wing commentators want to suggest.
Worldwide, interest rates are rising. That is down to Trump.
Musk has attacked the UK, and his friends in the City of London are willingly joining in the attack on Labour.
But, neither might have had much impact if Andrew Bailey and the Bank of England had managed monetary policy in a way that was even remotely responsible. They have not done that. In fact, what is very clear is that Bailey has, himself, gone out of his way to do everything he can to undermine the government by undermining growth and inflating its interest costs.
It is questionable as to whether either Liz Truss or Rachel Reeves should have reached the high offices to which they were appointed. But the one thing that seems certain is that Andrew Bailey set up both of them to fail and, so far, has got away with it.
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Andrew Bailey has got away with QT for the very simple reason very few in this country and elsewhere understand how a fiat monetary system really works. They are hoist as Shakespeare would have said by a laziness petard. They rely on conjecture with its incomplete information as opposed to theory which has been empirically tested to a high degree.
https://brainly.com/question/30733222
“A conjecture and a hypothesis are preliminary ideas that require further investigation, while a theory is a well-established framework that has withstood rigorous testing and scrutiny.
A conjecture is a statement that is believed to be true based on limited evidence or intuition, but has not yet been proven. It is essentially an educated guess, and requires further testing and analysis to be confirmed or refuted.
A hypothesis is a tentative explanation for a phenomenon or observation that is based on limited evidence or prior knowledge. It is often formulated as a testable prediction that can be supported or disproven through further investigation.
A theory, on the other hand, is a well-substantiated explanation of a natural phenomenon that is supported by a large body of empirical evidence and has been rigorously tested and confirmed through multiple lines of inquiry.
It is a broad and comprehensive framework that can explain a wide range of phenomena and is widely accepted within the scientific community.
The distinction between these terms is important because it reflects the level of evidence and confidence in the statement being made. It is important to use the appropriate term depending on the level of evidence and confidence in the statement being made.”
If as I’ve argued in previous posts that money is a distributional device or form of messaging then reducing its availability either through direct diminution of quantity or doing the same by raising its cost of use is going to reduce economic activity. In the UK economic growth is clearly stuttering. It doesn’t need the government and Bank of England pulling in opposite directions. Gordon Brown ought to have understood this when he gave the BoE quasi-independence.
Part of the problem is that even among those who agree that the Bank is responsible they often do not make the same case that you are making: Truss’s letter makes no mention of QT and assigns responsibility for the crash to the Bank due to its raising interest rates (the day before the budget, as well as announcing the QT it also increased interest rates) (You have previously said the crisis was caused by the combination of the Bank introducing the QT, raising interest rates, and then, as the crisis was starting after the budget, promising to raise interest rates further, although you have tended to focus on the QT).
You’ve been saying for a long time that the Bank was responsible for the crash, and I’ve seen this said in a few other places, but I’ve almost never seen it in the mainstream media, where it’s stated as a fact that Truss was responsible. I’m not sure if this is because it’s a such a minority view that it is ignored or if it is more widespread and is being deliberately avoided by the mainstream.
Richard, how common a view is it among economists that the Bank and not Truss was responsible for crashing the economy?
How common a view is it among those who work in the City/finance/bond trading/pension fund management?
You have some commenters who work in these areas so if they see this I would be interested in their view on this.
My view is uncommon. That does not worry me. It is the only rational explanation for what happeend. And you are right, I could and should have mentuioned rates.
I assumed that when the BOE issued bonds on behalf of Govt. (quantative tightening?) this was to fund Govt. Programs. In other words the impact on the economy is negative as the the money Govt. receive is spent in the economy. You’re saying they are issuing bonds which then is simply cancelled ie taking money out of the economy to I presume control inflation. Is this right?
Yes. That is what QT does.
‘The Conservatives like to portray themselves as ‘free speech absolutists’, yet as we know they’re the complete opposite. The last Tory government passed laws to crack down on protests that they didn’t like and they’re the first to try to shut down criticism.
In the latest example of Tory hypocrisy on free-speech, former Tory leader Liz Truss has sent Labour leader Keir Starmer a cease and desist letter demanding he stops claiming she crashed the economy.
Despite Truss being booted out of office after her disastrous mini-budget caused financial turmoil, sending mortgage bills soaring and the pound collapsing, rather than accepting her mistakes and showing humility, she has since blamed everyone else for why it all went wrong.
The Telegraph now reports that Truss’s lawyers have written the letter to Starmer, claiming that claims she crashed the economy are ‘false and defamatory’.
So much for Truss being a defender of free speech.’
Left Foot Forward
Agree with you fully.
The Bank of England is now out of control.
Andrew Bailey is the Colonel Kurtz-like figure of the financial sector in this country and his command needs to be terminated as soon as possible. He is operating without restraint in my view and who he is actually working for is not clear.
Richard’s analysis got my long-retired ‘Auditor’s Nose’ twitching again. Politicians are supposedly required to disclose personal income deriving from lobbyists and other source (although amnesia seems to be quite ubiquitous). Is the Governor of the BoE also required to disclose personal income from outside sources and if not, why not? Likewise all other BE employees who are in a position to make policy decisions affecting the UK economy. Just asking!
Reeves and Truss surely have in common the way they follow an ideology rather than what they could do that is good for the country. But whether they are both victims of BoE manoeuvring is less clear to me.
Truss and Kwarteng seemed to have some sort of paranoia, they weren’t prepared to put their budget to the reality check that the OBR was set up for. I may be wrong, but I assume that normally there would be behind the scenes discussions with the BoE about budget intentions and the planned direction of the economy; with Truss/Kwarteng there were clearly none and the Bank acted without knowledge of what would happen the next day. The fact there wasn’t a coherent economic direction was surely what caused the crisis (though the way pension funds were using hedging rather than direct investment in bonds was an important factor outside Truss’s control).
In the current case though, it is hard to see anything but bloody-mindedness by the Bank as justifying both QT and interest rates substantially higher than inflation.
When I saw your latest post about a coup taking place against the UK government, I immediately thought of what happened to Liz Truss. So I’m glad to see you’ve recently covered that very topic. There are so many parallels here.
It’s clear that it’s the market makers who have too much influence in politics since economics is the most powerful force that people of different persausions will unite over. As seen recently in the USA.
It’s a great tool since the average person has no clue of the inner machinations of the economy, yet they know that it is really detrimental to their quality of life when it things ‘go bad’. And that is why Andrew Bailey has escaped being held accountable so far. If the general public had really understood what he was up to, there would have been poll tax-level protests on the streets of Britain calling for his immediate resignation.
But he’s even more teflon-coated than Donald Trump when it comes to the complete lack of media scrutiny of his nefarious role in these affairs. He just sits there like a Bond villain stroking his cat, pulling strings whilst the politicians dance for his amusement.