England’s financial situation is spiraling out of control. The new government has introduced an economic plan that could predictably ‘won’t land well’, says economist Edin Mujakic, on the BNR Podcast Macro with Boot and Mujakic. “It’s chaos out there.”
The main cause of discontent among the British was the tax reforms. “These are reduced to a very small group, increasing the already high national debt in the coming months, you name it,” says Mujakic. That didn’t impress investors on the other side of the Channel: ‘They wonder what they’re doing there and then act like they’re doing now.’
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As the value of the pound plummets, so do interest rates. Conditions you usually only encounter in countries far from Europe, says Mujakic.
A difficult relationship
The new British cabinet and its proposed plans led to a difficult relationship with the Bank of England, the central bank there. However, the bank has taken steps to reduce interest rates which have been rising sharply. They had to, Mujakic continues. “The reason for that, as the bank itself says, is terrifying. They say financial stability is at risk.
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More precisely, many pension funds in the UK may have collapsed. ‘They work with a lot of derivatives’, Mujakic explains the situation. ‘If you work with it, it often applies to pension funds, if interest rates go down, a fund will get paid. If interest rates rise slowly but surely, there is nothing to worry about. But if interest rates rise dramatically in the short term, you need to deposit additional collateral as a retirement fund. That’s money they don’t have, so they’re going to sell their own bonds. Then you get a vicious circle.’
Downing Street
Nevertheless, the government in London seems to have little interest in the issue. “If I can believe the reports coming out of London, the government is doing nothing wrong,” continues Mujakic. According to the new cabinet, it has nothing to do with the budget they presented last week. According to Mujajic, this approach adds more fuel to the fire in the markets as investors are already outraged by the policy adopted. Now it is said that it is not the government’s fault but the markets themselves.’
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It also ensures that trust doesn’t quickly return, which, according to Mujajic, is essential to solving problems structurally. So he believes there are only two options: either withdraw the package, or go ahead and let the problems fester. ‘Of course it’s very disappointing. You make such a policy mistake after three weeks as Prime Minister. However, if you continue, already big problems will get worse.
No solution
He concludes: ‘Bank of England intervention to control interest rate rises is not a structural solution. That should give you some peace of mind. The only solution to this problem is to look at why interest rates have risen so high and the currency has fallen so low. And the reason is always – whichever way you look at it – it’s deliberate policy. So if we want to solve the problem once and for all, we have to stay away from the policy.’
