breaking news The historic gilt explosion is a warning to world politicians that we are in a new era

It has become one of those weeks that marks a turning point in real time.

Liz Truss made a lot of promises during her UK leadership race and they were all based on the idea of ​​easy money. Cutting taxes and increasing spending works for a while and is especially helpful when the central bank is cooperative, but we’ve reached the limit. The UK debt market is now in a fetal position. The game is over.

A particularly worrying part of the package is the energy price cap for consumers. The decision to limit bills to £2,500 means governments are taking all the risk for energy prices with no consumer incentive to conserve. It’s a £60bn budget item this year, but it could be a lot more (or less).

What it will do however is send a shiver down the spines of politicians across the rest of Europe. Many countries are currently developing energy crisis programs and it is now much more likely that the British model will not be used. I had thought that transferring energy liabilities from consumers/corporates to government would be bullish for European stocks, but now that’s unlikely. Instead, what is happening is that central banks are working against governments that now have to weather the crisis with spiraling borrowing costs.

Overall, this will mean that more of the burden of the crisis will fall on consumers and businesses. Of course, that means a tougher crisis and worse growth.

This is a losing situation for currencies and Deutsche Bank today warns that there is only a narrow way out.

It is extremely unusual for a currency in a developed market to weaken at the same time that yields rise sharply. But that is exactly what has happened since the announcement of the new chancellor. We fear investor confidence in the UK’s external sustainability is rapidly eroding. And the only thing that can keep the pound from weakening is a very aggressive bull cycle from the Bank of England which increases the yield on gilts. The market has already revised terminal prices in the UK to more than 5%, the highest of all other developed countries. But yesterday the Bank of England again rose below market prices. If the Bank of England does not follow through on this pricing, there will likely be even more monetary weakness.

Cable is down 204 pips at 1.1055 today, a 35-year low.

As bad as it is in the UK, the turn to bond market discipline has equally horrific implications overseas. The hope was that Europe (and the world) could overcome the energy crisis and then tackle debt sustainability. Now politicians have the impossible task of doing both at the same time.

Since the impulse to spend is not expected to spin as fast as the bond market, the release valve will be in the currencies. But this will create a negative feedback loop with inflation and further rate hikes.

Emerging markets have had to deal with these trade-offs forever and there is no easy way out. Given what happened in gilts today, politicians in developed markets should be scared.


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