Can someone explain what has happened simply?

[properdoughnut]

I really want to understand this.

What has happened to the pound? Why are mortgage rates going to be so high. Can someone please explain really simply what has happened?

So basically the government did a crap budget.

Because of this investors lost confidence in our country.

They dont thing we are gonna do very well, and the pound will lose value.

So people on the investment market sell their pounds. This makes the pound lose value. They bought other currency.

The problem is this is very bad for the country for a lot of reasons. A weak pound is very bad.

So to try and fix the problem the bank of England will probably need to increase interest rates.

If they increase interest rates. Investors will buy more pounds to try and get the interest on their investments. If more people buy pounds then the value of the pound will increase.

So the bank of England already increased interest rates by a bit a few days ago, but banks are worried they will have to do an emergency hike in the interest rates. Obviously if interest rates increase their cost of lending also increases. So some have removed mortgages so that they can increase the interest rates on the mortgages.

Basically the government fucked up with their budget last week and caused this shit show.

Summary- ask me if anything doesnt make sense.

Shit budget= investors lose confidence = weak pound= shit for the country= bank of England emergancy increase interest rates in hope of increasing value of pound= banks increasing mortgage rates.

Thank you!

So can the government undo it? Just say OK ok you didn't like that. Do they model these things before they do them?

That was very clear thank you. So to try and fix the problem the bank of England will probably need to increase interest rates. this bit filled the massive gap in my knowledge.

I'm not sure what the government will do.

Right now all the noises they are making sounds like they are doubling down on their current path.
All the news I've read , it sounds like they think their budget is right and they are supporting the current path.

One would have hoped that the person in charge of the country's finances wouldn't have made such a monumental cock-up in the first place. He should have known exactly what effect his budget would have, he has any number of economists and financial specialists at his disposal.

Is the UK having to borrow money at such a high rate because there won't be enough tax revenue coming in?

Yes, that's part of the reason that investors have lost confidence, we are creating what they consider unnecessary and unsustainable debt and our country is going into recession so the tax take would go down anyway but the government has also cut some taxes meaning that they have even less coming in to support the country, invest in services and pay off the national debt.

That's what I'm really struggling with. I understand the impact on mortgages and currencies - just! - but what I am totally baffled by is how this has been allowed to happen and what the intention was. This time last week we were in a pretty dire situation with the COL crisis. All the mini budget seems to have done is make matters worse. What benefit did they honestly think this budget was going to bring? Those who the COL crisis is really going to impact aren't in a position to save so higher interest rates mean naff all to us. Genuine question, what were the brains of the mini budget thinking in making these changes? Was the plan not to help with the COL situation, is that what I'm not understanding? The only people benefiting are the higher rate tax payers it seems and they're not the ones trawling the internet for electric blankets to purchase for their kids 😕

helpful explanation...

though it's made me realise that it all seems to be about these bankers. surely it's the investment bankers themselves who decide to get jittery and sell the pound?

so that then a different set of bankers raise interest rates.

and all about a budget that massively lowers taxes for rich investment bankers?

I do think its a shit budget. but even so there's something strange about this all just happening in the heads of people in the City??

Thank you! I'm so pleased I understand why this is happening now even though I'm very worried it is happening.

I do think its a shit budget. but even so there's something strange about this all just happening in the heads of people in the City?? yes it is a bit! Like some massive computer game that actually can screw up people's lives.

Part of the problem is the US dollar is very strong at the moment.

They have been raising their interest rates quite aggressively, this has increased its value a lot. Initially people thought last week the Bank of England was going to raise rates more than it did. It only raised it to 2.25% I think. Its not enough to compete with the rates in US, so confidence was already a little low. But right on the back of that there was the mini-budget which made things a lot worse.

What Rowthe said but I think all of this is being exacerbated by hedge funds and traders shorting the pound.

Well, investment bankers are paid to make a profit so they aren't going to leave their companies'/clients' money in sectors that are tanking or unstable - that's capitalism, for you. I agree that there can be a domino effect when significant investors and traders let it be known that they've exited sterling (or whatever).

It isn't that difficult to understand. Our current, new government, under Truss, know that their time is very limited. Now is the time to cash in and run. This 'mini- budget', concocted on the hoof, does exactly what it was designed to do: allow those with the serious cash (Tory-donating, hedge-fund managers) to leap in and short the pound. Please Google that if you don't know what that means; but, in short, (😉), it means 'betting on the collapse of Sterling', thus you win if Sterling collapses. Many rich people have increased their eye-watering wealth by 20-25%.

Voila.

This is what is happening.

Unfortunately, many red-wallers' understanding of 'the economy' goes no further than the corner-shop tick book.

Thank makes sense, I guess I want my pension in the investments that are going to do best and thats what they are paid for.

I'm not an expert, but from an armchair enthusiast's POV, the problem is that during Covid billions of currency units were pumped into economies around the world. Inflation was always going to be the price of utilising the "magic money tree", and interest rate rises are the most effective tool to contain it, especially since base rates have been abnormally low for far too long. A rise in interest rates strengthens currency, which is why the US dollar is doing comparatively well on the back of several early aggressive rate hikes. It is likely that part of the reason the pound has devalued is because the rises are not seen as aggressive enough. It's a vastly blinkered oversimplification to just say, "it's the government's fault for a crap budget." Pandora's box got opened during the pandemic, we were always told that it would have to be paid back somehow. This isn't a situation with an easy solution, either we get high interest rates, or inflation spirals out of control.

Was the plan not to help with the COL situation, is that what I'm not understanding? The only people benefiting are the higher rate tax payers

Precisely. The new worse-than-before Tory government decided to go full-bore capitalist reward the rich mini budget. It wasn’t a budget to address the COL for us plebs. It was to attract fat cats. And they even fucked that up.

It makes not so angry that this has been allowed to happen. I know politics has always been associated with dishonesty and game playing but it feel these last two years - with party gate and now this - we have become an absolute laughing stock and the British public are being totally shafted. There are no morals anymore it seems, no scruples, and most frustratingly no accountability. I feel so naive. I thought a government was meant to protect the greater good but as you say, the fat cats are the only winners. Maybe it's always been that way but I honestly don't think this country has even been in such a dire situation where millions of people are struggling and there is nothing any of us normal folk can do 😟

Ok so now the IMF have got involved and told them to have a rethink. Would doing a u-turn undo the damage or would investors still be a bit hmm... about the pound? I guess that can't really be predicted.

It crossed my mind that Liz Truss is actually working for the Russians, this is how bad this is 🤣

(as a double agent who has a mission to trash the UK economy)

My feeling is that the damage is done to a certain extent - why rush to invest in a company (country) where the CEO and CFO (Truss and Kwarteng) have shown quite so publicly that they are incompetent. If there is a U turn they are just unpredictable as well as incompetent.

It's so old fashioned. I know almost nothing about it, but I heard the plan and went back about 20 years. I was sure we knew trickle down didn't work, that making wealthy people wealthier in a time of crisis just lets them feather their retirement nest. I mean, that's what I am doing! Spending a minimum to save a maximum because man, the future looks bleak!

I'm not wealthy, but we are ok to ride out a storm. Just wanted to retire early.