December 3, 2022

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We’ll see a lot more this winter…

Written by Kostas Stupas

We’ll see a lot more this winter…

While we expected Italy to be a harbinger of developments in the international economy, the surprise came from the United Kingdom, where the new Prime Minister, as a true child of the younger generation of politicians, announced a massive tax cut programme, without completing it. With the corresponding deductions expenses …

Politicians today like to take action that rings in the ears of voters.

Donald Trump’s presidency has also slashed taxes as deficits and debt ballooned, with Federal Reserve chiefs publicly threatening not to insist on reversing quantitative easing programs.

So we live in an age where the right cuts taxes but not spending, which leads to deficits, and the left increases spending, which again leads to an explosion of deficits and debts…

Some academics, seeing this temporary equilibrium as permanent, have formulated MMT…

In her time, Margaret Thatcher was called, among other things, the “milk thief” because she dared to cut government spending at the same time as she cut taxes…

So Liz Truss announced tax cuts and the pound collapsed in the following days while interest rates rose close to Italian and Greek yields.

According to Citigroup analysts, the policies of Liz Truss are the biggest threat to the stability of the British economy…

“The Tras policy platform continues to pose the greatest risk to the economic side, in our view, with an inappropriate mix of pro-cyclical tax cuts and institutional disruption,” wrote Ben Navarro, chief economist at City UK.

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The fund’s total commitments are 34 billion pounds ($41 billion), according to a Bloomberg analysis.

Before the Citi announcement, the pound collapsed from 1.28 to the dollar in the middle of the summer to about 1.04… against the euro, it fell from 0.83 to about 0.90.

In 2016 in the UK, a referendum took place where Brexit prevailed by 52% to 48%.

The exchange rate for the pound sterling at that time was from 1 to 1.40 euros. Today it reached 1 to 1.12 despite the depreciation of the euro against the dollar.

British government bond prices are on track for their biggest monthly drop since at least 1957 in recent days, according to a Reuters analysis based on data from Refinitiv and the Bank of England.

The yield on 10-year Treasuries – which moves inversely to their price – has risen 131 basis points so far in September. The previous record was set in September 1986. UK 10-year bonds saw the yield rise yesterday by about 10%, or 37 basis points, to 4.2%.

On the other side of the Atlantic, the dollar accelerates, and usually when this happens markets, countries, companies and families collapse…

The appreciation of the US currency makes the products of US companies less competitive and this contributes to lower sales. Then declining profits put pressure on the stocks.

Foreign companies and countries that have dollar debt are also seeing an increase in the value of their debt and with it the cost of service. These are steps closer to bankruptcy.

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We’ll see a lot more this winter…

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