ALEX BRUMMER: Chill wind off the Atlantic

Just a week or so ago, former Chancellor Kwasi Kwarteng and Bank of England Governor Andrew Bailey were given a talk in Washington from Janet Yellen, the International Monetary Fund and anything and everything about the irresponsibility of Britain’s fiscal policy .

The message was that in the fight against inflation, monetary and fiscal policies must move in the same direction and independent institutions – in the case of Britain, the Office for Budget Responsibility (OBR) – must not be ignored.

As compelling as this analysis is of why vigilantes chose to target the now-defunct Liz Truss government, it showed great brutality.

When Britain backtracked on radical supply-side reforms — with a rollback of tax cuts and a pledge to submit its homework to the OBR by October 31 — confidence in the more important US bond market shattered.

With the abolition of what some critics called the ‘muppet premium’ in Britain – the surge in government bonds – US bond yields rose above those in the UK. This is despite America’s extreme privilege of having the dollar as the world’s main reserve currency. Major exporting countries, especially China and Japan, have large amounts of US Treasury bonds in their reserves.

Global markets are catching up with two aspects of US policy. In the run-up to next month’s midterm elections, President Biden and the Democrat-controlled Congress have been busily spending money, making Britain’s much-condemned mini-budget look like chicken feed.

Likewise, the prospect of the Federal Reserve returning tens, if not hundreds of billions of US Treasury bonds into US money markets – as the US central bank does its version of quantitative tightening (reversing money pressure) – has scared traders.

After a brief period in which the spike in government bond yields caused them to exceed US bond yields, there is a crossover. The yield on the closely followed 10-year Treasury bond rose to 4.276%, the highest level since the height of the great financial crisis of 2008. Under the headline The UK Market Meltdown Could Be Headed Your Way, the Wall Street Journal opined that Truss’s much-scorned fiscal package, which has cost £161 billion in five years, is modest compared to the fiscal expansion in other advanced countries.

The rapid tightening by central banks, a policy endorsed by the IMF, is beginning to put pressure on financial systems and governments around the world.

Yellen, who rose to her full five-foot height to punish Kwarteng, is now expressing concern about a lack of liquidity in US money markets.

There will no doubt be a sense of gloating about America’s just-deserved. It will be short lived because what is happening in the US, as we learned from the onset of the great financial crisis in 2008 and the Covid19 lockdowns in March 2020, has a nasty habit of crossing the oceans.

trust trick

One cannot blame the British opposition parties for taking full advantage of the disgraceful chaos in the Tory party. The leader of the Lib Dem, Ed Davey, has accused the government of “polluting the economy” and Labor’s Keir Starmer suggests the Tories have “lost control of the British economy”.

The political rhetoric may be justified, but one cannot help but feel that such comments only exacerbate the nation’s problems by undermining confidence in the UK.

The latest weekly statistical bulletin from the Office for National Statistics shows that confidence is fragile, but the country is not down and out.

Consumer data illustrates growth in sit-down dinners, UK retail visitor numbers and transactions at most Pret A Manger locations.

The opposition may be screaming at gas prices, but they fell 8 percent in the week ending Oct. 16, being 28 percent below 2021 levels (long before the invasion of Ukraine) and 68 percent below Aug. 22, 2022 when all there was. the rising price ceiling (now abolished) was discussed.

Meanwhile, flights at national airports reached 88 percent of 2019 levels in the same week, which is half the time.

Anecdotal evidence from retailers such as Marks & Spencer suggests that despite the unusually mild weather, spending on items such as winter coats and sweaters is surprisingly robust.

The danger is that with so much talk about crisis from politics and the media, it becomes a self-fulfilling prophecy.