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The British “mini-budget” announced before the weekend caused a sharp and historic drop in the pound sterling, which was battered in the foreign exchange market. Traders seem to have disliked the content of this plan, which provides for a series of tax cuts that mainly favor the richest. But beyond the gifts to the rich, it is the overall cost to the British economy that worries financial markets.
It’s a stock market killing game. The pound fell, on Monday, September 26, to a historically low level against the dollar. It was trading at $1.05 in Asian markets, a spectacular drop of 7% in two sessions (Friday and Monday). The British currency has never been so weak since the introduction, in 1971, of today’s pound sterling.
This stock market crash appears to be related to a major giveaway to the rich decided by the British government just before the weekend. Kwasi Kwarteng, Minister of Economy, presented on Friday a “mini-budget” or recovery plan made up of measures to minimize the impact of the rise in energy prices and especially tax cuts, among those that most benefit the rich.
Liz Truss, Trump instead of Thatcher
Some tax increases, starting with the announced end of the last tax bracket for those earning more than 120,000 pounds (134,000 euros) a year and the repeal of the ceilings on bonuses paid to bankers, have provoked strong reactions.
“It is a budget for the 1% [des plus riches]”, reacted Paul Johnson, director of the Institute of Fiscal Studies, when consulted by the British newspaper The Guardian. “It is a morally intolerable text”, lamented on Twitter Nicola Sturgeon, First Minister of Scotland.
If Prime Minister Liz Truss and her government have promised to apply a “Thatcherite” policy -in reference to the very neoliberal former British Prime Minister of the 1980s Margaret Thatcher-, “this recovery plan is more reminiscent of Donald Trump’s fiscal policy” said Alexandre Baradez, financial markets analyst at IG France.
The former US president had also promoted a very advantageous tax reform for the richest in 2017. In both cases, the economic logic is the same: the richest are supposed to reinvest part of the money earned in the economy, so that this gift ultimately benefits everyone.
Putting this so-called trickle-down theory into practice (from the top of society to the bottom) did not surprise stockbrokers in 2017, in the case of Donald Trump’s reform. But this time, they started dumping their British pounds as soon as this “mini-budget” for the “maxi-rich” was announced.
Believing that Liz Truss pushes the cork of neoliberalism too far, even for merchants, who are not yet at the forefront of critics of the current economic system.
The (too) strong dollar
In reality, investors did not become inequality destroyers overnight. “This plan is, above all, the straw that broke the camel’s back for foreign exchange market players,” said Alexandre Baradez.
Until now, all major currencies were under pressure from the dollar in similar proportions, and the British pound was no exception. “Originally, it was not so much a problem of a weak pound as a strong dollar,” explains Alexandre Baradez. In the current context of “high inflation and risk of global recession, the greenback is fully playing its role as a safe haven”, continues the analyst. In other words, merchants are dumping their other currencies so they can buy dollars.
And in this waltz of the forex (foreign exchange – foreign exchange market), the pound sterling has become the ugly duckling with which no one wanted to dance anymore.
The rate of inflation is, first of all, more sustained in the United Kingdom than in the euro zone. “This is one of the indirect consequences of Brexit”, underlines Alexandre Baradez. Given the rise in prices, wages also tend to rise, which contributes to fueling the vicious circle of inflation. This phenomenon is more marked in the United Kingdom because “the labor market has become much less flexible than in the European Union where the free movement of people facilitates the call for foreign labor to reduce pressure on wages”, analyzes the expert .
“A real distrust of the British economy”
In this context, it was not so much the gifts to the super-rich that set the stock market on fire, but the silence of the British government on the plan to finance these tax cuts that will cost £45 billion for the state. “It is above all a signal from the markets that they consider that perhaps the moment is poorly chosen to widen the deficit through fiscal handouts”, summarizes Alexandre Baradez.
If Liz Truss therefore does not have to fear the appearance of traders who would have burned her neoliberal idols, the message sent by the financial markets is nonetheless “the sign of a real distrust of the direction in which the economy”. ‘, notes the IG France analysis.
Above all, this mistrust of the stock market risks aggravating one of the evils that the British government seeks to combat. “In the short term, the collapse of the pound sterling will accentuate imported inflation”, analyzes Alexandre Baradez. In fact, everything that must be paid in dollars in international markets will cost importers more, who will pass on this increase to the consumer. A phenomenon that will probably affect a wide range of products that will be paid for in dollars, from the oil used for gasoline to the iPhones of the American Apple.