Chaos Hits British Markets and Government
It might be unfair to blame Liz Truss for everything, but the “British bond crisis”, as it will be called, unleashed by her draft budget, has opened dangerous cracks not only among British pension funds and banks, but also on the U.S. bond market and among Swiss banks, just to mention the most visible cases (cf. below). Ultimately, British Prime Minister Truss lost her battle against the Bank of England, and was forced to fire her hapless Chancellor of the Exchequer and reverse her plan (tax increases instead of tax cuts). Extraordinary liquidity injections by the Bank of England have momentarily stopped the collapse of government bonds (gilts), but runaway inflation has not been tamed and liquidity crises are popping up in other sections of the global financial system.
As we sum up here what happened, the reader must keep in mind that regardless of the contingent triggers of the crisis, the ultimate cause of the current, final crisis of the global financial system is the one identified long ago by Lyndon LaRouche: the creation of a pyramid of financial values decoupled from real physical productivity. Early on, LaRouche characterized the central banks’ pumping up of the financial bubble as “potentially hyperinflationary”, but magicians like Alan Greenspan, Ben Bernanke or Mario Draghi told you that liquidity was only being created in the realm of financial assets and would stay there, i.e., that the asset price inflation would never spill over into consumer price inflation…
But it did spill over — exactly as LaRouche had warned. Energy and commodity prices went up exponentially in spring of last year, as the capacity of the financial system to generate enough nominal profits was exhausted, and the immense liquidity which had pumped up the bubble stormed into energy, food and other commodity markets, magnifying the supply and demand imbalances. In the case of energy, the cuts in capacity generated under the “Green transition” offered hedge and vulture funds a golden opportunity to drive prices sky high — well before the war in Ukraine.
After insisting for months that inflation was “transitory”, central banks attempted to hit the brakes, by raising interest rates. Too late. The system had entered a “boundary condition” (as defined by LaRouche) in which no conventional measures would work. It was close to ending up in either a hyperinflationary blowout, or a chain-reaction collapse.
And that is what we have seen in the British bond crisis: Liz Truss’ tax cut measures accelerated the drop in value of British gilts already set off by the interest rate hikes; that generated a wave of margin calls on the collateral deposited by pension funds; the Bank of England reacted by injecting 65 billion pounds within a few days and opening short and long-term repo facilities for the banks. The storm abated only when Truss announced a 180° about-face in government policy. Many now expect 10 Downing Street to receive a new tenant very soon.