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?

Great explanation by Rowthe.

What the gov are attempting to do, via this mini budget, is give the economy a kick start. They hope that by growing GDP they can increase the tax take. They hope to attract businesses to the U.K. through deregulation. That’s what the ‘remove the cap on bankers’ bonuses’ thing is about. And the removal of the additional rate of income tax. And getting rid of the IR35 tightening measures that came in last year.

I suspect that they want us to be more like the USA, so expect to see more rolling back of e.g. your rights as an employee.

"Do they model these things before they do them?"

Well they are supposed to. Budgets are accompanied by a report from the Office for Budget Responsibility who are a separate authority who cost up the implications. But the government made this not-a-budget and gagged the OBR. Which further eroded market confidence

And yes, I think that Truss and Kwarteng are daft. They are taking a big gamble but aren’t helping themselves by attempting to keep the housing market in an artificial state of growth because anything else is a vote loser. That’s why they have softened stamp duty and that’s why the B of E is pussyfooting around increasing interest rates. If they were serious about defending sterling, rates would have been increased further last week.

Although the gov can probably see the silver lining of a weak pound: more foreign money investing in the U.K. Maybe some of it will go into businesses but any serious inflow of eg CNY will likely have the effect of inflating land and property values further and thus keeping the dimmer voters happy because they feel richer (“my house earns more than me!”)

Oh!!

We're doomed

If you listen carefully you can hear the sound of champagne corks popping in the city! The rich are going to do very well out of this - the rest of us? 🤷‍♀️ When have the Tories ever given a fuck about that?

Follow byvickysmith on Instagram - she does brilliant bite sized news stories breaking things down really well

This is the strange thing, so the same people in the City are both popping champagne corks and saying, shit budget plan, losing confidence in the pound

Obviously not, lots of different people in the City (and in the international equivalents) are saying different things! 🙄“Shorting the pound” works if you have advanced knowledge /make a good guess of what will happen, if you don’t have advanced knowledge / guess wrong then you are the ones pulling out of the UK market.

The bit I didn't know was covered by Martin Lewis today - that the markets particularly don't like borrowing when it's to cut taxes rather than for a specific reason (e.g. covid). He said it's a bit like borrowing to service an overdraft from general spending, rather than planned borrowing to replace something specific like a boiler.

Ok sorry another question. The Bank of England are going to buy some government bonds. How is this going to help?

Country UK is now seen a living beyond its means

They did it on purpose so they wont 'fix' it at all

It benefits different investors to short the pound

It also causes financial instability which is better for private investors taking advantage of that.

Overall it also creates less tax take so that when Labour have to increase it, they can provide a narrative that Labour always increase taxes.

I think the idea is that it takes some bonds off the market, so there is less supply. A reduced supply improves demand, so they can justify lower interest rates on the bonds

One comment I appreciated between two economists the other day was that the pound is not in the driving seat the gilt / bond is

So look to that to see what driving decisions will be made on next

The Bank of England are increasing the interest rates because they believe that the demand for products and services in the UK is too high (we're spending too much money apparently), so they lift interest rates, to make things like loans and mortgages more expensive, so we don't have as much money to splash out on excessive spending. This in effect increases Inflation, as our mortgage price goes up, but our wages don't, so we're paying more out than we earn.

Then as a complete opposite, we have Liz and the new budget, which will mean we're paying less Tax and so get more money from our wage packets to spend.
But in reality, this extra money will just get eaten up by the electricity price increases, and interest rate increases.

They are not working together collaboratively to benefit the country, or the people in it.
They are running their citizens like 'customers' and not people, trying to squeeze as much money out of us as possible.

Then we have the death of the Queen, which caused a big uncertainty about the future of the country. The Queen and the Royal family, whether you like them or not bring in a ton of tourism to the country. So investors are hesitant wondering if the tourism will still continue with Charles being King instead.

And then lastly, we have the US 'printing money' and flooding the country with $, which virtually inflates their economy, making their dollar appear better than other currencies, such as GBP.

Electricity Crisis + Queen's Passing + New PM + New Budget + Increased Interest Rates by BoE + US Printing $$ = A Very Unstable Country atm.

The BoE move appears to be to stop pension funds collapsing due to collateral calls. There’s a good explain here: twitter.com/danmikulskis/status/1574660633877962753?t=bSgQSVQj0MwSXvVWIVnnTQ&s=19

Without BoE intervention multiple major pension funds would have gone into insolvency this afternoon as a direct result of government policy.