Financial markets should act as a corrective more often

The truss chaos is over, but normalcy in the UK is bad enough. The Bank of England fought inflation of more than 10 percent on Thursday with the largest interest rate hike in 33 years. That rate move would have been even bigger if outgoing Prime Minister Liz Truss had pushed through her plan for significant unfunded tax cuts. But the financial markets prevented that. Investors’ harsh verdict ensured that Truss’ tenure lasted less than two months and will remain a footnote in British history – as did her dangerous fiscal plans, which would not have been accompanied by reforms and would therefore have fueled inflation even more.

The voice of the market is needed

The pressure from the capital market has once again proved to be an important corrective. It was not the political opposition in Westminster or social pressure that got the government on course and ultimately swept it out of office. It was investors’ flight from UK government bonds that drove 10-year yields from just over 3 percent to as high as 4.5 percent in September and October. It has since fallen to less than 3.5 percent. The reason for the flight was concern about escalating national debt. Incidentally, this turmoil has highlighted risky funding practices by UK pension funds.

This shows that the voice of the market is needed. Unfortunately, she could not rise for a long time. The last time it turned against western industrialized countries was in the euro debt crisis from 2010. Investors complained about the ailing public finances of Greece in particular, but also of Italy, Ireland, Spain and Portugal. The resulting rescue packages eased the situation on the stock exchanges, but with their comprehensive liability they also undermined the individual responsibility of the states. Obligations have been blurred. The bracket of the euro also prevented the ailing countries from being able to regain their competitiveness through a weaker currency.

Market signals were undermined even more by the loose, unconventional monetary policy of the western central banks after the financial crisis. The flood of money that kept government bond prices high and yields low covered everything for years. In this environment, concerns about the sustainability of sovereign debt failed to translate into perceptible price signals. On the contrary: the artificially low interest rates fueled public debt. “When should you get into debt if not now?” thought Truss’ populist predecessor Boris Johnson – and was kept in check by Truss’ successor Rishi Sunak, then Chancellor of the Exchequer.

Unconventional monetary policy must be scaled back

The Bank of England had also implicitly made it easier for the state to borrow with its bond purchases. In the meantime, however, the central bank is setting a good example: as early as February, it stopped replacing maturing government bonds in its portfolio with new paper, which would have kept the total level of investments constant. Instead, he began to shrink. And as the first major central bank, it has also been actively selling government bonds for a few days. This course must be taken worldwide if the swarm intelligence of investors is to act as a reliable corrective again.

But is that legitimate? The “speculators” have imposed their will on British society, criticize skeptics. They fail to recognize that Truss’ plans were not part of any election program. The short-lived head of government was not elected by the people, but by members of the Conservative Party. When policy change gets out of hand, investors have the loudest voice. You should be able to raise them.

You can refer to Benjamin Triebe, Editor for Business and Business Twitter follow.