The resignation of the UK's prime minister caps a tumultuous month in which an unpopular tax plan tanked financial markets, forced emergency intervention from the Bank of England, and sowed immense disapproval among the British public.
People looking across the pond don't need to be worried. There isn't likely to be a fight between markets and the government in the near future. Since the 1980s, the Federal Reserve has raised interest rates at a faster rate. The odds of any near-term policy are very low because of the snail's pace at which legislation moves through Congress.
Biden has an easy choice to make: let the Fed do its job, and hope the strength of the US economy can keep it out of a downturn in three years.
There was a choice to be made between boosting short-term economic growth and fighting inflation. The wrong choice can be very damaging.
The new Conservative government in the UK had a rough start. A mini-budget that proposed tax cuts for the wealthy was unveiled by the Prime Minister. The aim was to boost economic growth and reduce the chances of a recession.
The investors didn't think that way. The British pound fell to a record low against the US dollar, while gilts fell as well. The economists argued that the proposal would cause the government's deficit to be sharply higher and cause inflation to be even worse. The Bank of England bought unlimited bonds in order to prevent a financial crisis.
Most of the damage was done by that time. Increased concern about the government's financial health resulted in higher gilt yields. The central bank's plan to start selling bonds was undermined by the actions of the central bank. The weakened pound made imports much more expensive.
45 days after she took office, the prime minister resigned. The market carnage made it clear that the rebuke will be swift and severe if the government ever proposes such a misguided economic policy. Her mini-budget is the main reason that she will be the shortest-serving PM.
The prime minister had a less than ideal start to her tenure. The UK economy was already suffering from high energy prices and was expected to get worse in the next few years. The Bank of England had raised interest rates to slow the economy and rein in price growth.
The mini-budget was proposed to address concerns about the economic downturn. It was the worst of the two battles to fight.
The way in which the government is structured made a big difference in the first weeks of fall. With the Conservative Party holding a healthy majority in the House of Commons, there were few obstacles to be overcome. Markets were unsure if the prime minister would push the package through the legislative body or cave to outside pressure until she reversed her stance.
The role of a contest between members of the Conservative Party was secured by Truss after Boris Johnson's exit. She didn't face the same pressures as a publicly elected leader.
The checks and balances in the US government make it hard for rapid-fire economic policy to happen. The same factors that slow congress keep unpopular proposals from becoming law. The Senate's ability to hold up Republicans' efforts throughout the Trump presidency is currently the same as it is for Democrats. The package would die in congress if Biden or Trump had proposed it.
The market reaction was worsened by the fact that the mini-budget could have easily been pushed through Parliament. Without effective checks delaying or stopping the proposal, investors rushed for the exit, fearing that the plan would cause a new crisis in the UK.
Market volatility is dulled by the lengthy and unpredictable process needed to pass laws. By the time a tax cut is finalized, traders usually have weeks to price in the policy's economic impacts.
The US is not invulnerable even though it is more insulated from political and financial disasters.
Markets can easily be spooked by the president's questionable policies. Markets were driven lower by Trump's trade war threats. The moves were normalized soon after as economists weighed in and the former president gave ultimatums.
Congress was in session within hours of a market cataclysm. The threshold limits how much the government can borrow to cover its bills for previous spending, and lawmakers have routinely punted the issue down the road. There were passionate debates between Democrats and Republicans over which party should be held responsible for the government's debt.
One day before government debt was set to hit the limit, Biden gave the go-ahead to increase the debt ceiling. Wall Street was worried about whether such a hike could be accomplished. If the limit is not lifted, global confidence in the US dollar will be destroyed.
Moody's Analytics said last year that if Congress hadn't agreed to raise the ceiling, households would have lost billions of dollars in investments and Americans would have been out of work.
Bipartisan action has been spurred by that threat. Markets are growing more fearful that the ceiling could soon be breached because lawmakers have gotten closer to the deadline.
When Republicans take control of the House, the next debt-ceiling squabble will take place in23. The next debate is likely to be more down-to-the-wire than the previous one. The US could be in for an economic catastrophe like the UK experienced in September.
All Rights Reserved © 2024
