Jon Moynihan has written a fascinating piece for the Critic in which he lays the blame for the fall of Liz Truss’s Government squarely at the feet of the Bank of England. It wasn’t the ‘disastrous’ mini-budget that caused the pound to plummet and bond yields to rise, but the Bank’s scandalous mismanagement of the money supply – based, in part, on its desire to protect its pension fund. Here’s how the piece begins:
George Soros is widely known as the man who broke the Bank of England. As we will see, the Bank is quite capable, advertently or inadvertently, of breaking governments.
The brutal demise of the Truss administration following the mini-budget has been widely attributed to the market’s reaction to the expectation of unfunded borrowing occasioned by tax cuts and the fuel price cap. To the contrary: the market’s behaviour was quite clearly a response to the actions – and inactions — of the Bank of England, before, during and after the mini-budget.
One part of, but not all of, the case against the Bank has been cogently made by Narayana Kocherlakota, a well-respected economist and former President of the Federal Reserve Bank of Minneapolis, in a Washington Post piece entitled “Markets didn’t oust Truss – the Bank of England did”. Kocherlakota’s view was that the Bank of England was responsible for the crisis, through “poor financial regulation and highly subjective crisis management”. Outside the UK chatterati, this view is widely supported.
The beef against the mini-budget was that it spooked the market. But virtually all of the policy announcements made by Kwasi Kwarteng on the day were not new; they had been pledged during the Truss campaign or — in the case of the energy price guarantee — confirmed shortly after her arrival in Downing Street.
Sure, the mini-budget stated that clarifying how all the spending/lowered tax revenue would be paid for was to be put off until the later financial statement, due some weeks later. But the only new thing was the change to the top rate of income tax from 45 per cent to 40 per cent.
Given the well-known dynamic impact of lowered tax rates, this change would arguably have been revenue neutral or even beneficial; even without any dynamic benefit, it could have cost at most £2 billion in tax revenue. That is a rounding error compared to the amounts already absorbed by the market and a fraction of the costs Rishi Sunak has accepted at COP 27 — to which the markets have reacted entirely complacently. It is just not credible to blame the mini-budget for the market turmoil.
And yet the gilt market spiked, spectacularly; sterling was under pressure and the narrative sprang up that people wouldn’t be able to get new mortgages, nor be able to service existing mortgages when their mortgage payment rate came to be recalculated. All this was gleefully blamed on the mini-budget.
So why did bond yields spike so suddenly? The missing link in the story is the peculiar, some would say unpardonable, actions of the Bank of England, in particular its failure to understand, and respond to, the increasingly dangerous behaviour of a large sub-sector of Britain’s pension funds, the so-called Liability Driven Investment funds (LDIs).
Very much worth reading in full (no paywall).
It’s extraordinary that this story hasn’t been covered by Britain’s financial journalists. Hopefully, this article by a retired businessman will shame them into action.
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The Bank of England’s mismanagement?
Yeah right, mismanagement.
They had no idea, no idea whatsoever that announcing categorically no more bond purchases would cause a problem in the market just when Truss was announcing her budget.
Give me a break.
Presumably the Bank of England also allowed Fishy to “mismanage” his way through Lockdown to the tune of five hundred billion pounds principally via the issue of dodgy loans, ‘eat out to help out’ and a ‘sit on your arse getting paid to do FA’ scheme comically named ‘furlough.’
Yeah right.
Why have I got a nagging feeling that the B o E is being run by the WEF? No, surely not.
Mmmmm, up to a point Lord Copper. The big unfunded sum wasn’t the £2bn from the 45% to 40% tax cut but the open ended, 2 year commitment on energy costs. At the time this was being forecast to cost £100bn +. Again, a panic reaction. Sunak has largely benefited from the gas price coming down & a mild autumn.
How can a 2-year commitment be open-ended? And how come the markets did not panic when every rich world government on the planet shut down large portions of their economy and started paying people to do nothing, and the open-ended commitment to buy “vaccines” etc?
You’re right. Why was there an such a variance in response? My point is merely that it shouldn’t be portrayed as a binary choice between ILDs and mini budget. There were a whole lot of other things going on with asymmetric impacts.
Because there’s a point up to which Govt debt raises concern not panic. Take it beyond then you get panic.
“It’s extraordinary that this story hasn’t been covered by Britain’s financial journalists.”
Hardly. It’s entirely to be expected given that most/all of Britain’s mainstream journalists and their bosses, editors, owners, financial or otherwise, are fully bought into the narrative.
With the possibly honourable exception of Liam Halligan
Indeed. The only part where I disagree with the article is where he describes the market size by stating it as ‘The total value of liabilities hedged with LDI strategies was $1.8 trillion in 2021.’.
LDI, as he describes earlier, has absolutely nothing to with hedging, to the contrary. It is a pure interest rate speculation, and one that actually reduces or negates any previous and underlying asset/liability match of a pension fund engaging in it.
The whole BoE board should be fired for allowing LDI to happen and those who sold and practiced it should be prosecuted and made personally liable for its losses.
The central bank failure here also reminds me of PCR’s splendid analysis and assessment of the FED’s sole responsibility for bringing about the Great Depression.
https://www.unz.com/proberts/is-the-federal-reserve-merely-incompetent-or-is-there-a-dark-agenda/
https://www.unz.com/proberts/an-incompetent-federal-reserve-board-caused-the-great-depression-and-the-new-deal-that-gave-congress-power-to-new-executive-branch-regulatory-agencies/
The one time in a century when central banks should really provide credit and liquidity amply and immediately, they deliberately always seem to fail to do so.
We’d better be off without them, as the period and system before they came into existence showed.
Best to give them all the Icahn treatment and to turn their defined benefit pensions to ‘whatever is left in the fund’ ones.
I work in the LDI industry (as in, it’s what I do 80% of my time at work), so like to think I can speak about it with some degree of confidence.
There is nothing wrong in principle with LDI, in my view. Most pension schemes would like to fund their liabilities with secure assets that pay fixed or inflation linked cashflows. Only goverment bonds fit the bill (assuming of course that the government doesn’t default) as no other assets are as secure or provide long dated cashflows (some pension scheme liabilities stretch out by more than 50 years).
The problem is that the return on gilts is too low, and most pension schemes have a funding gap that they need to fill. They do so by borrowing money, collateralised by the gilts that they hold, to invest in higher returning assets, for example equities.
What happened was that the value of gilts fell, which meant that the loans needed to be propped up by more gilts. For some pension funds they were running so short of gilts that they had to start selling them to pay down the loans with cash. This led to a fire selling spiral that eventually ended when the Bank of England stepped in to support the market.
The background to LDI is that the government and regulators have absolutely encouraged pension schemes to adopt this strategy. Largely in good faith, in my view.
For example, all pension schemes need to pay a levy to the Pension Protection Fund each year. How large this is depends on a number of factors, but one is investment risk, and the more of your pension scheme liabilities you hedge the lower your levy is.
I think the Bank of England acted ineptly and arrogantly, but I don’t necessarily feel there was a hidden agenda.
All this is aggravated by regulatory and central bank incompetence and failed interventions. The FSA/FCA are also complicit in the failures.
The next stupidity, scandal and black hole….
https://www.telegraph.co.uk/pensions-retirement/news/gold-plated-public-sector-pensions-cost-taxpayers-150pc/
This is actually the real divide in our societies and the real fight, the private vs the public sector, and what will break Western democracies soon.
It’s even worse in Europe and the US, but the UK seems to be unique in having uncapped automatic indexing on DB public sector pensions.
As it was unique in having sold all its gold at the low and having issued massive amounts of long term inflation linked bonds, instead of issuing long term fixed coupon ones, during a prolonged period of artificially low interest rates.
Lunatics in charge of the asylum at the BoE and the Treasury.
Let’s not forget Carnage Carney had a spell at the B o E. I wonder what mischief he got up to during that gig?
‘“poor financial regulation…’
its always the part of the market that’s still free that’s the problem therefore… MORE REGULATION!
Two years of economic shutdown, the economy awash with valueless money, Truss promising to throw more valueless money onto the inflationary fire and the markets think ‘bad risk’ maybe even default. An energy crisis that Government policy is to make it worse.
The fire was already raging, Truss just threw more fuel on it.
Lowered tax rates are suppose to be accompanied by lower Govt spending otherwise higher spending. Lower tax rates during inflation caused by too much money chasing too few goods just adds more money to the chase.
The Bank of England should have done what exactly? It’s not the Government as the article suggests it must be.
They should have been more aggressive in raising interest rates rather than disappointing the markets with a modest rise.
The misnomer and myth that lower taxes ALWAYS bring in less revenue, perpetrated through all the usual avenues to stir up a storm is / was the chokehold many an authority and expert have used before – though in this case the dystopian elites who want to bring in their new system are showing their colours [by any means necessary it would seem] once again. But the Conservatives (so-called) bend over and take it as if it’s never been their bread and butter?
Naturally Labour (and their cheerleaders) play their predictable part too with all the usual race-to-the-bottom fearporn predictions which many unfortunately fall for, especially during times of uncertainty (though at least it’s opposition in the form we’d expect) but any semblance of bringing us back from the brink is now in full swing I guess.
I’m not an economist but I understand the basics of a genuine free market. Nothing makes sense in any of this posturing of doom and gloom other than it has to be an organised destruction of the system we have – to usher in a system we would never want (if it was genuinely explained and to the uninitiated).
As far as the B of E to play this tactic at a time like this reveals their intent, if indeed bankers were of the sort to be trusted even a morsel for their own benefit and monetary gain (at least with their desire for profit we know where we stood). Now we’ve thrown out the old with the new, the pertinent question is where are they now to get their ill-gotten gains? I guess it’s safe to look to ESGs and CBDCs for where they’re expecting.
“the pertinent question is where are they now to get their ill-gotten gains?:
The poor bloody infantry as usual.
US.
Deleted. Posted in error.
Dead right. Andrew Bailey is a WEF stooge and we know that they don’t want Western countries to have pro-growth policies. They want increased indebtedness because that gives them power via the financial markets.
I tend to the view that the intention is to utterly bankrupt the country and then sort of sell it off or mortgage us to something like the IMF.
I can call my wife in evidence to confirm I suspected the hand of the BoE in Liz Truss’s deownfall from the beginning, She should ask suitable questions in the HoC to force Ministers to confirm (doubtful) or deny and lie about this.
Yes, obvious isn’t it. WEF wanted Sunak. BoE did the dirty work to fake alarmism from MSM. I have to say though that Truss seemed too inept to understand what was happening.
Although all of this it true (the BOE and government in general setting up the rules for the LDI meltdown to happen in certain circumstances) and the moral hazard is disgraceful, it would be wrong to exonerate Truss because of it (and don’t forget that she had already pledged gajillions with an energy price cap). It was her (and Kwast’s) job to KNOW these rules and that her actions might end up triggering the meltdown. If she didn’t know, that is bad. If she DID know and proceeded anyway, that is even worse.
Her ineptitude has meant 0 debate on whether a change to lower taxes and business friendly is a better alternative to more of the same high taxes and control. We all lose because of that.
It was pretty obvious that the Bank of England (no doubt with the support of the Treasury) DELIBERATELY destabilised the Markts/currency.
They carried out a coup ….. in plain sight. And CON MPs let them do it.
Aye – Tobes is way behind on this one. Even Dan Bongino reported on it on 28th September (I don’t normally watch him, was looking for a comment on Nordstream and it was there.) 6 mins in 3 mins long.
https://rumble.com/v1lv248-who-bombed-the-pipeline-ep.-1861-the-dan-bongino-show.html