Can someone explain in laymans terms what is happening with the BOE/pension funds on Friday?

Understand this - keep voting Tory and this is what you will get- inept selfish people running the country

Look I’m not going to argue about party politics but what makes you think labour are any better?

I have had the unfortunate experience of having to fight our local government for gentrification and guess what they think nothing of the little people. Our local Labour Party is as bad as putin!

Full of misogynist men who bully women, getting back handeds and looking after there mates. Every politician makes me repulsed as they are horrible people.

Vote of no confidence in government is the most obvious answer. Which tory backbenchers support. This is different to the 1922 Committee route which took out Johnson. The problem for the 1922 route atm, is the party rules don't allow for a challenge to the leadership in such a short period. Truss currently has immunity. They could change the party rules but this requires a vote and is time consuming. This situation is much more urgent and needs action on Wednesday not next week.

If the pm fails a vote of no confidence in the Hoc, she has the choice to either resign or a ge is called. If the PM resigns without calling an election then there is a period within someone must be put forward someone who can claim the support of the house ie get a majority of MPs to support them - this is usually along the lines of having the support of majority party but it doesn't have to be. In theory it can be a cross party government. (see WWII). The Tory party could put up a temporary leader if the members agree to it (with the view to having a leadership contest which is a risk to the markets in its own right as the government is effectively in limbo until conclusion of that with the temporary leader somewhat handicapped over making significant decisions. The markets won't like this uncertainty and lack of anyone in real control) or they could simply agree on a single candidate to be PM without the need for an internal party election.

Problem with this is, atm, a GE means tories voting to make themselves unemployed. Which is why most won't take the risk. And the Tory party is so factionalised it would be incredibly hard to come to agreement on an annioted successor to Truss. You really can't rule out Johnson in this scenario btw - he is perhaps the only person I think the party will think can pull it off.

Thanks to all of you explaining this so well and simply. Professor Feynman would be pleased.

My question is - do you think it's a problem that so many of us don't really understand how all of this works? Do you think if we all had a better understanding of how capitalism and all the little mechanisms within worked it would influence anything?

This is what is happening:

A Gilt is debt issued by the UK. When the Treasury needs to borrow money, it issues a Gilt (effectively an IOU note) to investors. For example, if the Treasury issued a £100 4% coupon 5-year Gilt, it would receive £100 from an investor and give them in exchange an IOU note in which it promised to repay the investor £100 in 5 years time and in the meantime pay them £4 of interest each year. The investor doesn't have to hold the IOU note until the Treasury repays the debt at the end of 5 years. It can sell the IOU note to other investors or buy more IOU notes from yet more investors if it wants to.

For reasons I won't go into here (because it will take ages to explain) defined benefit (aka final salary) pension schemes need to invest the money they will ultimately use to fund their members' pension payments in Gilts. Lots and lots of Gilts. So many, in fact, that they borrowed money to buy those Gilts. For example, if a pension scheme had £100, it went and borrowed an extra £200 and invested £300 in Gilts. Borrowing money to invest in something magnifies gains and losses. In the example given above, if you had invested just the original £100 and your Gilt investment lost 20% of its value you would have lost £20, leaving you with £80. However, if you borrowed £200 and invested £300, then you would have lost £60, leaving you with just £40 once you had paid back the £200 you borrowed.

For yet more reasons I won't go into (because I lack the skill to explain this in layman's terms), when interest rates rise, the price of Gilts falls.

The Bank of England sets interest rates and uses them to control inflation by increasing them when inflation threatens. Because of a mix of Brexit, Covid shutdowns in China and Russia's invasion of Ukraine, there have been supply shortages of certain things (e.g., oil/gas because of the Ukraine thing). This has led to inflation because when things are in short supply their prices increase.The Bank of England has raised interest rates to combat this inflation. This led to the price of Gilts falling. A lot.

Then old Truss/Kwarteng come along and announced a load of tax cuts. Tax cuts are inflationary because people have more money to spend, further driving up the price of those things in short supply.

This meant the Bank of England had to raise interest rates even more. The price of Gilts fell further. A lot further.

Now back to those pension schemes. They are making huge losses on their Gilt holdings. Because they borrowed money to invest in those Gilts, their losses have been magnified, and the people who lent them the money are now demanding they pay it back, so the pension schemes are having to sell Gilts to repay the money, further driving down the price of Gilts... it's a vicious cycle.

To help the pension schemes, the Bank of England offered to step in and buy Gilts. By buying Gilts, the Bank of England drives their price higher, thereby stemming the pension schemes' losses and arresting that vicious cycle. However, the Bank of England really doesn't want to do this. The reason why is because the Bank of England has to print money to buy the Gilts. Money printing is inflationary... so will ultimately drive interest rates higher (to control the inflation), which will force the price of Gilts lower, so the Bank of England has to print more money to buy more Gilts to save the pension schemes... and so on. Another doom loop. That is why the Bank of England put a time limit on buying Gilts - they wanted to do just enough to buy the pension schemes some time to stablise themselves - then stop to avoid the doom loop scenario. That time limit expires this Friday.

People thought the Bank of England might extend the time limit because the pension schemes are still in a huge mess, however the governor has just said that won't happen (presumably because he wants to avoid the doom loop scenario). So now everyone is shitting themselves.

It's all horribly messy. I don't know how this will be fixed, but the only realistic options are: 1) the Bank of England capitulates and starts buying Gilts again (this isn't a good answer because of the doom loop issue), or 2) Truss/Kwarteng reverse all their stupid tax cuts and resign.

If neither of those two things happens some pension schemes may make irrecoverable losses which would mean they wouldn't have enough money to fulfil the promises they made to their members. The only way to fix this would be for the pension scheme employer to put money into the scheme (some won't have enough), for the government to put money into failing schemes (i.e., a bailout) and/or the pension schemes break their promises to their members and don't pay them as much money as they said they would when the members retire - likely a combo of the three.

Because the Labour party is in the economic mainstream. What Truss is doing is genuinely mental. She's the Tory equivalent of Corbyn.

Rishi Sunak said Truss would fuck the economy, he was right.

What is happening now is extreme and the only winners will be the already very wealthy, like the top 5%.

I think we need a basic economics tv show where the money flow is explained in a digestable way, so we can all understand the ramifications of different actions.

But unless it was combined with some sort of celebrity reality competition set in the jungle or on an island that necessitates the wearing of swimwear, almost no-one will watch it apart from the people who already understand a lot of what is covered anyway.

What I would love to know is - will all this affect interest rates and therefore mortgage rates?

And I really don't think any local party of any colour is 'as bad as Putin' @Andypandy799 that comment is both offensive and embarrassing.

Thanks to all of you explaining this so well and simply. Professor Feynman would be pleased.

My question is - do you think it's a problem that so many of us don't really understand how all of this works? Do you think if we all had a better understanding of how capitalism and all the little mechanisms within worked it would influence anything?

Why is this happening to pension funds only, and not to all other investment funds? Are they the only ones borrowing to buy gilts?