The UK’s ‘Trussonomics’ crashes the pound and leaves investors shaking their heads

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Reports of the new UK government’s plan to cut taxes and rack up debt are, er, far from glowing.

Here’s the deal: The British pound fell to a record low against the US dollar on Monday as investors around the world sold British assets.

For the first time in history, the pound is on course to reach parity with the dollar before the end of the year. At its low on Monday, the British currency was trading at $1.03 before stabilizing around $1.07. (For comparison, the pound has fallen from $1.34 at the start of the year.)

Some of the pressure on the pound is coming from the strong dollar, which has been boosted by US Federal Reserve rate hikes. (The dollar tends to rise during uncertain times when investors are hungry for a place to park their money while experiencing economic shocks like a pandemic, war, or inflation. Or all at once.)

But the pound is also falling against the euro, signaling broader concerns about the UK’s financial health. Let’s dig a little deeper:

  • Right now, the UK is looking less like a safe haven for investors as the UK government embarks on a huge, frankly mind-bending bet on tax cuts that is turning years of fiscal policy on its head.
  • To be clear, almost no one outside of the Liz Truss government, which replaced Boris Johnson as prime minister less than a month ago, agrees with her unorthodox, trickle-down approach known colloquially as trussonomics.
  • Truss’ economic theory holds that tax cuts will help boost a sluggish economy and cushion any looming recession.
  • But, as critics of its plan have long pointed out, the policy will force the government to incur huge debts to pay for both the tax cuts and a government program to limit payments on the staggering consumer energy bills the country has fallen into a cost of living crisis.
  • Under the plan, all UK households will see their income tax rates reduced and their energy bills capped at around $2,700 a year on average. But as my colleague Anna Cooban writes, it will be the richest who will benefit the most.
  • Crucially, Trussonomics’ pro-growth objective is fundamentally at odds with the Bank of England’s anti-inflation mission.
  • key quote: “Serious questions are already being asked about the economic competence of the new government,” said Craig Erlam, senior market analyst at Oanda.
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As the pound plummeted on Monday, pressure mounted on the Bank of England to intervene with an emergency rate hike to try to boost confidence in the pound. While the bank issued a statement saying it was closely monitoring the situation, it stopped short of an emergency hike.

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The pound’s fall is a far bigger problem than just the significant headache it’s causing for currency and bond traders.

Brits are already struggling to pay for food and fuel with inflation hovering around 10% and a weaker pound will only make essentials more expensive.

“This is a painful reminder that economic policy is not a game,” said Torsten Bell, executive chairman of the Resolution Foundation, a think tank focused on improving the living standards of low- and middle-income households.

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“When you’re younger you can go out and get two or three jobs, you can be frantic … But when you’re a senior, it’s difficult to turn around.”

For example, Catherine Powell, a lifelong Clevelander, found herself back into the workforce at age 62 and took a part-time job to help other seniors apply for benefits like the Supplemental Nutrition Assistance Program.

The Fed has warned of the “pain” that comes with rising interest rates, but seniors and others on a fixed income are already living it, reports my colleague Martha C. White.

How about some happier news, eh buddies? For this I turned to my colleague Parija Kavilanz, who reported today that we citizens could finally get price reductions just in time for the holidays.

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Long story short, remember how pandemic-related supply chain issues left the shelves empty and forced you to wait nearly a year for that new oven to arrive? Well, fast forward to now, these supply chains haven’t fully recovered, but the stores are now cluttered with crap they can’t sell because they assumed we were all buying out our fears like in 2020 (inflation had other ideas).

That means the holidays will be all about deals. And the sale starts earlier than ever. Amazon just announced a second Prime Day event for mid-October; Target and Walmart are also launching holiday sales next month.

But there’s at least one big, sparkling exception to the sales bonanza. That blingInfant.

The sale of Christmas decorations has been in full swing for the past two years, Parija writes, and that puts the entire category in good shape, even with the sting of inflation. Jewelry is seen as a good investment, so people will be choosing quality over quantity when shopping for gifts this year.

It also helps that there’s no such thing as a must-have new phone, gaming console, or trendy exercise bike competing for the big gift.

Bottom line: jewelry is always an asset for Christmas, in case someone I live with needs ideas…