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Manchester United share price: Football clubs should not be run as businesses – a Report

This is the first in a series of pieces I will be writing on the finances of football teams. Today, I assess Manchester United in an deep dive report….



This is the first in a series of pieces I will be writing on the finances of football teams. Today, I assess Manchester United in an deep dive report. The world’s biggest football club is 90% privately owned, with the remaining 10% trading publicly on the New York Stock Exchange.

I have never liked Manchester United.

I guess it’s natural. Growing up, nearly all of my friends supported either Man Utd and Liverpool. And they always won. For years, they won and they won and they won some more.

While the number of supporters for Man Utd has somewhat dissipated, now that they are led by Harry Maguire rather than Roy Keane, my contempt for them remains as strong as ever – borne out of jealousy, self-loathing and perennial disappointment with my own football team of choice (Newcastle).

So, with the caveat of my potentially egregious bias out of the way, let me (objectively, and not subjectively at all) assess the Manchester United ownership model, its stock price, how the stock has performed this year and how so much of this sordid tale sums up what is wrong with modern football.

Who owns Manchester United?

Brentford FC do.

Well, in a literal sense, not really. Man United were privately owned for nearly 100 years, before going public in 1991 (FYI – being a proud Newcastle United fan, I will be refusing to give in to the discriminatory habit of referring to Man Utd as “United” in this article).

Man United were then traded publicly thereafter for 14 years until Malcolm Glazer completed a takeover of the club for £800 million ($1.4 billion at the time) in 2005. Man Utd were, once again, a private company.

Glazer was from New York, born to Lithuanian parents.  He was only a teen when his father passed away, leaving his mother to care for him and his six siblings. Selling watches door-to-door to support the family, he eventually flipped this hustle into a successful watch repair business before moving into real estate. A charming backstory, but this little fella is the villain of this piece, so don’t get too attached.

Glazer grew his empire and became immensely wealthy. He made his first foray into professional sport in 1995, when he bought the Tampa Bay Buccaneers of the NFL for $195 million. Today, Forbes estimates the franchise is worth $3.68 billion (that’s a tidy 19X on his investment). They are currently led by one of the greatest to ever play the game, quarterback Tom Brady – whose most recent visit to Manchester was only a few months ago.

Malcolm Glazer passed away in 2014 after being in poor health for many years, splitting his 90% Man United stake evenly between his six children (more on how his stake was diluted down to 90% to follow).

Why are the Glazers so unpopular?

While the Glazer family is more popular Stateside, where the Buccaneers won the SuperBowl in 2003 and again last year, their reign has been controversial in Manchester.

But why?

It stems from how the late Malcolm Glazer purchased the club. He bought his first shares in the club in 2003 before completing the takeover in 2005 for a total of £800 billion. He took ownership via a leveraged buyout, a very common method in the world of public markets, but one that divides opinion in the sports world.

This means that he took out a large loan to complete the purchase; a loan that was secured by the assets of the club. Man United, previously without debt, now had £660 million of debt. This debt was split between the club and a holding company used to complete the purchase.

However, crucially, Man United were responsible for paying the interest. It is this interest – as well as debt – which has fuelled the anger against the Glazers.

Before we get to the interest (and dividends – that’s where it gets really fun), it’s important to mention the final twist in the ownership tale. The Glazers refinanced the debt via half a billion of bonds, as well as floating 10% of the club on the New York Stock Exchange in 2012. So, since 2012, we have the added wrinkle of being able to track the share price of the club. Fun!

The club’s net debt had risen as high as £773m in 2010, but the Glazers paid down a hefty chunk of it following a bond issue of half a billion. Following the IPO, the debt fell even further, close to £200m. But over the past couple of years, as clubs worldwide struggled with the impact of COVID decimating matchday revenue, lowering TV hauls and other effects, it is back up to £592 million.

Interest and Dividends

This is where things get nastier than a Granit Xhaka two-footer.

Man United have paid £743 million in interest since Malcolm Glazer’s leveraged buyout in 2005 – a fact fans are aggrieved with given the debt currently sits at £592 million, only marginally lower than the £660 million at the time of the takeover.

Compared to other clubs in the Premier League, Man United’s debt is behind only Chelsea (£1.5 billion) and Tottenham (£854 million). However, Tottenham’s debt is to fund their swanky new stadium – one I visited last year and was shocked to see they pour pints that fill from the bottom of the cup via some sort of revolutionary magnetic device (it was better than the football at least, a drab 1-0 victory that made me pine for the not-so-free-flowing football of Steve Bruce).

Meanwhile, Chelsea’s £1.5 billion loan was provided interest-free, a questionable business move but one which highlights the growing tension between the passion of football fans and the reality that this is also a very real business.

So the debt, while not otherworldly by any means when compared to the size of Manchester United. Forbes estimate it at a little over $4.5 billion, although considering Chelsea was recently sold for $5.25 billion, I think the Forbes gang need to re-check their numbers. Either way, the debt balance is not significant when looking at the revenue and balance sheet.

But it’s still debt. In the Glazers’ detractors’ eyes, the interest payments on the debt should be used to funnel money into infrastructure such as the stadium, academy and magnetic pints, rather than taking “Man United’s money” out from the club. A fair point.

But when you look at capital expenditure, which is the best way to gauge this investment, Man United are behind only Tottenham, Man City, Liverpool and Leicester over the last decade – coming in a very respectable 5th. I plotted this graphically below (note I excluded Tottenham for scale purposes as their $1.4 billion spend).

Sidebar: For the fans who complain that Old Trafford is decrepit, may I suggest you take a visit to St James’ Park. Not even a lick of paint was within the budget for Newcastle, who spent a measly $7 million over the last decade. That’s genuinely impressive stuff, Mr Mike Ashley. But I digress.

Of even more substance, however, is the criticism of the dividends. The Glazers are the only owners in the Premier League to pocket dividends. They have taken out £133 million in dividends since over the last decade. In June, a payment of £11 million in dividends was made, the bulk of which the Glazers pocketed.

Football is a business

The crux of this issue is quite simple.

Football is a cultural phenomenon. It is so entwined in UK life – indeed, life around the world. I grew up in Ireland yet so much of my childhood was spent sitting on my couch watching Newcastle games, or Leeds and Arsenal games – my Dad has the unfortunate ignominy of supporting a team that has been even less successful than Newcastle over the past few decades, while my brother is an Arsenal fan (it’s been a long 25 years).

I have travelled to many games in St James’ Park. I have joined the Toon Army in Manchester, London, and elsewhere, and one day I hope to travel to Europe to see them play in the Champions League.

This experience is not exclusive to Newcastle, of course. I sent my friend Conor – as passionate a Man Utd fan as they come – a message to pick his brain on the Glazers as I put together this story. Back came a 13-minute voice message filled with heartache, anger and a pining for past glory.

Football is important to people. It brings people together. I keep in touch with friends through it, visit my Grandparents to watch it, and chat at water coolers about it. It is the same with millions around the globe.

But unfortunately, it is also a business – and that is the problem here.

The leveraged buyout model is a standard takeover seen time and time again in financial markets. And from a business perspective, why would the Glazers not extract value from the club in the form of dividends, for both themselves and the public shareholders?

And looking at average attendances below, Old Trafford is always 99% full – aside from when worldwide pandemics get in the way – so why would the Glazers, as a business decision, invest more in the stadium?

The sad reality is that there is no reason to do so. Just like if you owned a company yourself, you would run it to maximise profit. It’s just the gut-wrenching truth that football clubs are not like any other companies. They are vitally important to people, friends, families and countries.

Just look at the determination of authorities to get football back on the TV during the COVID lockdowns, in order to provide people with an outlet, to see evidence of this.

Champions League qualification and on-field success

Perhaps, one could argue, that spending on infrastructure would improve the performance of the club, leading to a greater ability to attract players and potentially more on-field success.

But until recently, the narrative that Manchester United can attract the best players in the world has been unquestioned. Angel Di Maria, Cristiano Ronaldo, Casemiro, Alexis Sanchez and Jadon Sancho are just a few highly sought-after talents who have arrived over the last few years for mega-money.

Failure to qualify for the Champions League is definitely a commercial consequence of neglecting footballing performance, however. Then again, from the Glazers’ point of view, Man Utd have not really been lacking here.

Last year was seen as the most disastrous season in recent history for the club when they finished in sixth place, missing out on a coveted top 4 slot and the accompanying revenue that comes with Champions League qualification. But the year before, they came second and hence they competed in Europe’s premier competition just last season, netting €77.3 million in the process.

Knocked out by Atletico Madrid in the Round of 16 following a 1-0 victory in the second leg at Old Trafford, Man Utd did earn less prize money than was on offer. For contrast, Liverpool, their English rivals who reached the final of the competition, earned €66.3 million compared to Man Utd’s €20.5 million in prize money.

Overall, Liverpool outearned Man Utd €117.6 million to €77.3 million, a margin of €40.3 million. While that’s a hefty chunk of change (even if barely enough to turn the light on in your home this winter), in footballing terms this is not much for a financial behemoth like Manchester United.

This season, however, there will be no Champions League at all – but rather the ignominy of second-tier European competition on Thursday nights, aka the Europa League. It’s kind of like going to the bar for a pint and being told they only serve bottles. It’s just meh.

What does “Glazers Out” mean?

“Glazers Out” is the rallying cry from Manchester United fans to try oust the leaders from their beloved club.

They argue that given the dividends, interest and other disrespect of the club that there is no option anymore but for the Glazers to walk away.

The campaign was launched in the aftermath of the takeover in 2005, although only by a minority. They even created a spinoff club, called FC United Manchester. The club is the second largest fan-owned club in the UK (by number of members, behind only Exeter City FC) – showing how rare this model is in English football (I will write another piece on German ownership in future because that is a completely different box of frogs).

Each member owns one share in the spinoff Manchester club, with these shares granting equal voting rights. It is therefore democratically run via these members – in a way, it kind of sounds like a Web3 use case, now that I write about it (hey, any excuse to wedge some crypto in).

In every way, this model is the antithesis of Manchester United and the Glazer model. This juxtaposition extends even to on-field success over the last decade, with the club sealing three consecutive promotions and reaching the second round of the famed FA Cup in 2010, only 5 years after its founding – all while Man Utd have descended to become one of the laughing stocks of English football.

They now compete in the seventh tier of English football, although have been embroiled in controversy themselves at times.

I’m sorry about that. It is a bit sad, that part, but I wonder just how big a United supporter they are. They seem to me to be promoting or projecting themselves a wee bit rather than saying, “at the end of the day the club have made a decision, we’ll stick by them.” It’s more about them than us.

Alex Ferguson on FC United of Manchester in 2006

This was only a minority, however. With Alex Ferguson still at the helm, Man Utd continued to move from strength to strength, winning five Premier League titles in seven years and a Champions League against Chelsea in 2008, after John Terry elected to employ a unique “two-footed slide tackle” technique in the penalty shootout. Good times.

The post-Ferguson era has been rather turbulent, however. A series of managers and high-profile signings have floundered, and the former perennial winners fell away. The fact that this coincided with the rise to elite status of cross-city neighbours Manchester City, and the return to form of arch-nemesis Liverpool, made it an even more bitter pill to swallow.

And the “Glazers Out” campaign has since moved beyond a minority of dissenters.

European Super League

With Wayne Rooney, David Beckham and Eric Cantona now condemned to the past, the new generation of Paul Pogba, Romelu Lukaku and Aron Wan-Bissaka stepped into the limelight – and failed to hold up standards.

This gradual on-field collapse culminated in the rather ugly off-field episode during the COVID pandemic, when Man Utd, alongside five other English clubs, announced they were one of the founding members of the European Super League.

At a time when the country, and the globe at large, was struggling through the pandemic, the Glazers made an egregious move to rip up the footballing world as we know it. Striving to claim a bigger slice of the commercial pie that was the juggernaut of club football, they aimed to bid adieu to the Premier League.

The move was obviously universally panned and the backlash was so severe the league was suspended three days later. For many, it was the last straw, showing once and for all that all the Glazers cared about was dollar signs, rather than preserving an institution of English football that had been around since 1878.

For me, I watched this drama unfold as a fan of one of the excluded “plebian” clubs – i.e. every club in the UK outside the top 6. I believe this was the saddest day in my 25 years of football fandom (greater than both the relegations I have endured) and I remember – like everyone – being scared that football itself was on death row, never mind just my own sorry club.

Like I said, my own personal bias and jealousy of Man Utd’s success, as well as the fact I have spent so much of my life listening to nonsense from my friends about such frivolous topics like how Paul Pogba has the talent to be one of the best players in the world (he doesn’t, and after half a decade of underperforming it’s time to give up, people), my hate for Manchester United burns strong.

Having said that, the world would be a sadder place without them – and football would be less fun. There is enjoyment in turning on my TV and exclaiming out in joy at the latest David De Gea howler. There is pure happiness in seeing Harry Maguire’s blank expression as the TV cameras unfairly zoom in on him following Brighton scoring a third goal.

That’s football. The highs and the lows, the partisanship, the tribalism and the emotions. The Glazers, alongside other owners of the big clubs, tried to take that away from both Man Utd fans and fans of everyone else – who wants to compete in a Premier League without the top 6?

And so, the Glazer Out campaign grew stronger – now to a point where it was attracting mainstream media attention. Then, last month, an absolutely disastrous start to the season threw the Glazer Out mantra all over the airwaves. Embarrassing losses to Brighton and Brentford caused more and more fans to vent.

Glazers Out was trending, Gary Neville was ranting and Whatsapp groups around the globe were deriding Man Utd fans, who were getting sympathy from absolutely nobody (see again: five premier league titles in seven years).

Elon Musk

Elon Musk – never one to let a good opportunity to troll slip him by –  could not risk teasing Man United fans in the aftermath of their humbling by Brentford.

Following Musk’s tweet, shares briefly spiked 17% before giving back gains. Still, it ended the day up 3% from its previous close. Musk did clarify that it was a joke, likening it to his tweet a few months ago where he declared he intended to buy Coca-Cola so he could put the cocaine back in the recipe. Incidentally, that is the second-most popular tweet in the history of Twitter, at a pretty impressive 4.8 million likes.

How has the Manchester United stock price performed?

But Elon cameo aside, the share price has been ticking along rather smoothly this year. This is especially evident when plotted against the S&P 500 – a useful metric to display the relative performance of Man Utd compared to the stock market as a whole (which for the unfamiliar, has tumbled this year in the wake of an inflation crisis, rising interest rates and the Russian war).

The recent surge coincides with a great run that Manchester United have gone on, including wins over Liverpool and Arsenal. They are now one of the very few stocks that are positive overall in 2022. Looking at my portfolio, I certainly wish I was a holder (although I would never be able to look myself in the eye if I bought Man Utd stock. I may be poor, but at least I sleep at night).

In other words, the Glazers continue smiling.

But interestingly, the recent run has again served to quell the “Glazers Out” sentiment. Indeed, this is something that rival football fans often criticise Man Utd fans for. Not only that, but some of the more vocal legions of the fanbase often lament the fact that the bulk of the fanbase is unable to sustain any sort of continued protest – certainly nothing of the sort that has affected the share price (see below graph).

Just as in the past, a few big wins and the Glazer Out sentiment has died down. Or, as one (Chelsea supporting) friend put it when I asked what happens the Glazer Out protest in the wake of the emphatic victory over Liverpool, “they put away their scarves until the next time, I guess”, referencing the green and gold scarves sometimes seen at Old Trafford to protest the Glazer ownership.

I tracked the Glazer Out phrase and the results spike before dying down to pretty much nothing time and time again, following a victory, new signing or other piece of positive news related to on-field performance. For the Glazers, this chart will be music to their ears (or good TV to their eyes?) and likely the big reason why they have remained unfazed for so long about the supposed discontent within the fanbase to their ownership.

Zooming out even further to assess the trend since the start of the Glazer reign, shows the pockets of discontent come and go – but the recent one weathered in August was comfortably the biggest since the takeover went through in 2005. And now it’s back to normal, brushed under the carpet with the Glazers continuing to make bank. Or at least until Newcastle waltz into Old Trafford, Callum Wilson nets a hat-trick and sends the fans into “Glazers Out” raptures once more.

But to me, this is slightly unfair. Man Utd is a massive juggernaut of a company, as a quick glance at the below revenue figures will reveal. It’s only natural that it is hard to unify a fanbase this large – by most estimates, it is the most popular football club in the world (where did we go wrong, people?).

It’s more than a football club, really. It’s one of the most recognizable brands in the world. Every young kid turns on their TV and one of the first clubs they see will be Man Utd.

They are the vanilla ice cream of the football world, and I don’t mean that as an insult. There are some highly passionate vanilla fans out there; people who wake up in the morning and head to the shop specifically for a hit of soft, creamy vanilla to get their day going. But there are also a bunch of people who, if in a position where they are choosing an ice cream to cool themselves down while on holiday, will take vanilla. They are casual fans, contributing their cash nonetheless to the vanilla maker, yet who would not go the extra mile to fight to improve the vanilla flavour. They would just eat chocolate. Or swap from ice cream altogether, electing for a smoothie or a packet of crisps instead.

That analogy rapidly lost relevance. But what I am trying to say is that it makes sense that the protests against the Glazers are so difficult to sustain. Man United is the biggest football club in the country. Not only that, it is the biggest in the world. People will always watch them play, they will always buy their jerseys, and they will always travel to games. That is true regardless of the amount of debt on the balance sheet.

So in this context, I sympathise with the fans of Man Utd who are subjected to the derision that a sustained protest cannot be carried out.

Expenditure on new assets

One thing a lot of Glazer sympathisers point towards is Man Utd’s bloated transfer spend under the Glazers. It is absolutely colossal, let’s be honest. Their transfer spend is more than any other club in Europe over the last decade.

In the context of the above, the money is staggering. This is especially true given the accusations that Man City received for “buying” the league. Indeed, as a fan of a non-top 6 club with no horse in the race, these arguments between the top 6 over who spends more bemuse me.

They all essentially have limitless spending. Sure, some are bigger than others – City, Man United, PSG – but it’s hardly pennies that the smaller of the big clubs are spending. It is rare that any of these clubs cannot pursue a player they desire because they cannot afford him.

The line that Man City and Chelsea bought their league titles is strange. Man United have a limitless pool of resources when looking at their commercial pulling power – gate receipts, merchandise sales, brand value etc – that really is second to none.

But because this comes from the Manchester United brand, I suppose, it is seen as “fairer” than that it came from the pockets of a rich owner akin to Man City or Chelsea.

But again, I digress (I think I’ll have to write a deep dive on the fascinating – and frankly depressing – tale of how Saudi Arabia came to own my beloved Newcastle, and the money implications there). What matters is that the Glazers quite literally could not have pumped more money into Manchester United football club than they have.

But the issue is not around the money. It is the source of it – this is not their money, per se. And this is the part that Man United fans despise – it is the club’s money. The club generates this cash through their mammoth brand, and the Glazers distribute a portion of it into the transfer market whilst also pocketing dividends for themselves.

But on the flip side, it really is not possible to spend any more money. And the debt is not a problem compared to the size of the club, its revenue, and its balance sheet. This is not a Barcelona situation.

The real issue here that most fans have is the on-field performance (or lack of it, I should say), regardless of the chatter around debt. If Man United get back to their winning ways like the days of Alex Ferguson, the Glazer Out chat would die down even more. In fact, it kind of already has, following a few wins on the bounce.

But I still have more sympathy for Man United fans than most. The Glazers owning this football club – nay, this institution – is wrong. The model is flawed. The club is too important to its fans, the public and the country at large. While certain ownership situations are undoubtedly worse – ask any fans of Bury, Derby, Leeds, (even Newcastle!) and many other clubs – the way the Glazers are funnelling this club for money is grating to see.

By employing non-football executives and other businessmen, they have made some terrible decisions and their signings have been historically bad – but the share price has ticked along, and the dividends have flowed.

American franchise model

It circles back around to their ownership of the Tampa bay Buccaneers. American sports are vitally different in that they are run as franchises, meaning there is no relegation or promotion. Revenue is more secure and hence the owners enjoy stability and guaranteed revenue regardless of on-field success.

This was the driving force behind the European Super League; an initiative which sought to bring the European football model more in line with the American franchise model.

But there are cultural and historical differences across the Atlantic. Football – I’m talking soccer here, just for clarity – has no place for a franchise-led model. And the Glazers are trying to run this club as close to a franchise as they possibly can.


This all comes down to one thing: the Glazers are running Manchester United like a business. But Manchester United should not be run like a business, it should be run like a football club.

It is a sad situation and the Glazers are a very bad thing for football in the UK and Europe. Stories like the European Super League are a direct consequence of the strangling effect that money is having on football.

Regardless of your thoughts on Man Utd as a club – and again, I hate them more than most; I can’t even bring myself to put a Man Utd player in my fantasy team at the moment without feeling nauseous – this should be a matter of concern for all football fans.

In a lot of ways, the Glazers sum up what is wrong with modern football. There is nothing wrong with how they are running their business; in fact, they are running it well.

The problem is that they are running it like a business in the first place.

The post Manchester United share price: Football clubs should not be run as businesses – a Report appeared first on Invezz.

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How The State Of Global Markets Could Be Pushing The Federal Reserve To Adopt Bitcoin

Analyzing the precarious positions of the world’s fiat economies can drive a conclusion that the Federal Reserve will have to adopt bitcoin.



Analyzing the precarious positions of the world’s fiat economies can drive a conclusion that the Federal Reserve will have to adopt bitcoin.

This is an opinion editorial by Mike Hobart, a communications manager for Great American Mining.

Photo by Daniel Lloyd Blunk-Fernández via Unsplash

In the wee hours of the morning on Friday, September 23, 2022, markets saw yields on the U.S. 10-year bond (ticker: US10Y) spike up over 3.751% (highs not seen since 2010) shocking the market into fears of breaching 4% and the potential for a run in yields as economic and geopolitical uncertainty continued to gain momentum.

Source: TradingView

Yields would slowly grind throughout the weekend and at approximately 7:00 a.m. Central Time on Wednesday, September 28, that feared 4% mark on the US10Y was crossed. What followed, approximately three hours later, around 10:00 a.m. on Wednesday, September 28, was a precipitous cascade in yields, falling from 4.010% to 3.698% by 7:00 p.m. that day.

Source: TradingView

Now, that may not seem like much cause for concern to those unfamiliar with these financial instruments but it is important to understand that when the U.S. bond market is estimated to be about $46 trillion deep as of 2021, (spread across all of the various forms that “bonds” can take) as reported by SIFMA, and taking into consideration the law of large numbers, then to move a market that is as deep as the US10Y that rapidly requires quite a lot of financial “force” — for lack of a better term.

Source: TradingView

It’s also important to note here for readers that yields climbing on the US10Y denotes exiting of positions; selling of 10-year bonds, while yields falling signals purchasing of 10-year bonds. This is where it is also important to have another discussion, because at this point I can hear the gears turning: “But if yields falling represents buying, that’s good!” Sure, it could be determined as a good thing, normally. However, what is happening now is not organic market activity; i.e., yields falling currently is not a representation of market participants purchasing US10Ys because they believe it to be a good investment or in order to hedge positions; they are buying because circumstance is forcing them to buy. This is a strategy that has come to be known as “yield curve control” (YCC).

“Under yield curve control (YCC), the Fed would target some longer-term rate and pledge to buy enough long-term bonds to keep the rate from rising above its target. This would be one way for the Fed to stimulate the economy if bringing short-term rates to zero isn’t enough.” 

–Sage Belz and David Wessel, Brookings

This is effectively market manipulation: preventing markets from selling-off as they would organically. The justification for this is that bonds selling off tend to impact entities like larger corporations, insurance funds, pensions, hedge funds, etc. as treasury securities are used in diversification strategies for wealth preservation (which I briefly describe here). And, following the market manipulations of the Great Financial Crisis, which saw the propping up of markets with bailouts, the current state of financial markets is significantly fragile. The wider financial market (encompassing equities, bonds, real estate, etc.) can no longer weather a sell-off in any of these silos, as all are so tightly intertwined with the others; a cascading sell-off would likely follow, otherwise known as “contagion.”

The Brief

What follows is a brief recount (with elaboration and input from myself throughout) of a Twitter Spaces discussion led by Demetri Kofinas, host of the “Hidden Forces Podcast,” which has been one of my favorite sources of information and elaboration on geopolitical machinations of late. This article is meant solely for education and entertainment, none of what is stated here should be taken as financial advice or recommendation.

Host: Demetri Kofinas

Speakers: Evan Lorenz, Jim Bianco, Michael Green, Michael Howell, Michael Kao

What we have been seeing over recent months is that central banks across the world are being forced into resorting to YCC in an attempt to defend their own fiat currencies from obliteration by the U.S. dollar (USD) as a dynamic of the Federal Reserve System of the United States’ aggressive raising of interest rates.


An additional problem to the U.S.’s raising of interest rates is that as the Federal Reserve (the Fed) hikes interest rates, which also causes the interest rates that we owe on our own debt to rise; increasing the interest bill that we owe to ourselves as well as those who own our debt, resulting in a “doom loop” of requiring further debt sales to pay down interest bills as a function of raising the cost of said interest bills. And this is why YCC gets implemented, as an attempt to place a ceiling on yields while raising the cost of debt for everyone else.

Meanwhile this is all occurring, the Fed is also attempting to implement quantitative tightening (QT) by letting mortgage-backed securities (MBS) reach maturity and effectively get cleared off their balance sheets — whether QT is “ackchually” happening is up for debate. What really matters however is that this all leads to the USD producing a financial and economic power vacuum, resulting in the world losing purchasing power in its native currencies to that of the USD.

Now, this is important to understand because each country having its own currency provides the potential for maintaining a virtual check on USD hegemony. This is because if a foreign power is capable of providing significant value to the global market (like providing oil/gas/coal for example), its currency can gain power against the USD and allow them to not be completely beholden to U.S. policy and decisions. By obliterating foreign fiat currencies, the U.S. gains significant power in steering global trade and decision making, by essentially crippling the trade capabilities of foreign bodies; allied or not.

This relationship of vacuuming purchasing power into the USD is also resulting in a global shortage of USD; this is what many of you have likely heard at least once now as “tightening of liquidity,” providing another point of fragility within economic conditions, on top of the fragility discussed in the introduction, Increasing the likelihood of “something breaking.”

The Bank Of England

This brings us to events around the United Kingdom and the Bank of England (BoE). What transpired across the Atlantic was effectively something breaking. According to the speakers in Kofinas’ Spaces discussion (because I have zero experience in these matters), the U.K. pension industry employs what Howell referred to as “duration overlays” which can reportedly involve leverage of up to twenty times, meaning that volatility is a dangerous game for such a strategy — volatility like the bond markets have been experiencing this year, and particularly these past recent months.

When volatility strikes, and markets go against the trades involved in these types of hedging strategies, when margin is involved, then calls will go out to those whose trades are losing money to put down cash or collateral in order to meet margin requirements if the trade is still desired to be held; otherwise known as “margin calls.” When margin calls go out, and if collateral or cash is not posted, then we get what is known as a “forced liquidation”; where the trade has gone so far against the holder of the position that the exchange/brokerage forces an exit of the position in order to protect the exchange (and the position holder) from going into a negative account balance — which can have the potential of going very, very deeply negative.

This is something readers may remember from the Gamestop/Robinhood event during 2020 where a user committed suicide over such a dynamic playing out.

What is rumored to have occurred is that a private entity was involved in one (or more) of these strategies, the market went against them, placing them in a losing position, and margin calls were very likely to be sent out. With the potential of a dangerous cascade of liquidations, the BoE decided to step in and deploy YCC in order to avoid said liquidation cascade.

To further elaborate on the depth of this issue, we look to strategies deployed in the U.S. with pension management. Within the U.S., we have situations where pensions are (criminally) underfunded (which I briefly mentioned here). In order to remedy the delta, pensions are either required to put up cash or collateral to cover the difference, or deploy leverage overlay strategies in order to meet the returns as promised to pension constituents. Seeing how just holding cash on a corporate balance sheet is not a popular strategy (due to inflation resulting in consistent loss of purchasing power) many prefer to deploy the leverage overlay strategy; requiring allocating capital to margin trading on financial assets in the aim of producing returns to cover the delta provided by the underfunded position of the pension. Meaning that the pensions are being forced by circumstance to venture further and further out onto the risk curve in order to meet their obligations.


As Bianco accurately described in the Spaces, the move by the BoE was not a solution to the problem. This was a band-aid, a temporary alleviation strategy. The risk to financial markets is still the threat of a stronger dollar on the back of increasing interest rates coming from the Fed.

Howell brought up an interesting point of discussion around governments, and by extension central banks, in that they do not typically predict (or prepare) for recessions, they normally react to recessions, giving credit to Bianco’s consideration that there is potential for the BoE to have acted too early in this environment.

One very big dynamic, as positioned by Kao, is that while so many countries are resorting to intervention across the globe, everybody seems to be expecting this to apply pressure on the Fed providing that fabled pivot. There’s the likelihood that this environment actually incentivizes individualist strategies for participants to act in their own interests, alluding to the Fed throwing the rest of the world’s purchasing power under the bus in order to preserve USD hegemony.


Going further, Kao also brought up his position that price inflation in oil is a major elephant in the room. The price per barrel has been falling as expectations for demand continue to slide along with continual sales of the U.S.’s strategic petroleum reserve washing markets with oil, when supply outpaces demand (or, in this case, the forecast of demand). Then basic economics dictate that prices will diminish. It is important to understand here that when the price of a barrel of oil falls, incentives to produce more diminish, leading to slow downs in investment in oil production infrastructure. And what Kao goes on to suggest is that if the Fed were to pivot, this would result in demand returning to markets, and the inevitability for oil to resume its ascent in price will place us right back to where this problem began.

I agree with Kao’s positions here.

Kao continued to elaborate on how these interventions by central banks are ultimately futile because, as the Fed continues to hike interest rates, foreign central banks simply only succeed in burning through reserves while also debasing their local currencies. Kao also briefly touched on a concern with significant levels of corporate debt around the world.


Lorenz chimed in with the addition that the U.S. and Denmark are really the only jurisdictions that have access to 30-year fixed rate mortgages, with the rest of the world tending to employ floating-rate mortgages or instruments that institute fixed rates for a brief period, later resetting to a market rate.

Lorenz went on, “…with rising rates we’re actually going to be crimping spending a lot around the world.”

And Lorenz followed up to state that, “The housing market is also a big problem in China right now… but that’s kind of the tip of the iceberg for the problems…”

He went on, referring to a report from Anne Stevenson-Yang of J Capital, where he said that she details that the 65 largest real estate developers in China owe about 6.3 trillion Chinese Yuan (CNY) in debt (about $885.5 billion). However, it gets worse when looking at the local governments; they owe 34.8 trillion CNY (about $4.779 trillion) with a hard right hook coming, amounting to an additional 40 trillion CNY ($5.622 trillion) or more in debt, wrapped up in “local financing vehicles.” This is supposedly leading to local governments getting squeezed by China’s collapse in its real estate markets, while seeing reductions in production rates thanks to President Xi’s “Zero Covid” policy, ultimately suggesting that the Chinese have abandoned trying to support the CNY against USD, contributing to the power vacuum in USD.

Bank Reserves

Contributing to this very complex relationship, Lorenz re-entered the conversation by bringing up the issue of bank reserves. Following the events of the 2008 Global Financial Crisis, U.S. banks have been required to maintain higher reserves in the aim of protecting bank solvency, but also preventing those funds from being circulated within the real economy, including investments. One argument could be made that this could be helping to keep inflation muted. According to Bianco, bank deposits have seen reallocations to money market funds to capture a yield with the reverse repurchase agreement (RRP) facility that is 0.55% higher than the yield on treasury bills. This ultimately results in a drain on bank reserves, and suggested to Lorenz that a furthering of the dollar liquidity crisis is likely, meaning that the USD continues to suck up purchasing power — remember that shortages in supply result in increases in price.


All of this basically adds up to the USD gaining rapid and potent strength against nearly all other national currencies (except perhaps the Russian ruble), and resulting in complete destruction of foreign markets, while also disincentivizing investment in nearly any other financial vehicle or asset.

Now, For What I Did Not Hear

I very much suspect that I am wrong here, and that I am misremembering (or misinterpreting) what I have witnessed over the past two years.

But I was personally surprised to hear zero discussion around the game theory that has been occurring between the Fed and the European Central Bank (ECB), in league with the World Economic Forum (WEF), around what I have perceived as language during interviews attempting to suggest that the Fed needs to print more money in order to support the economies of the world. This support would suggest an attempt to maintain the balance of power between the opposing fiat currencies by printing USD in order to offset the other currencies being debased.

Now, we know what has played out since, but the game theory still remains; the ECB’s decisions have resulted in significant weakening of the European Union, leading to the weakness in the euro, as well as weakening relations between the European nations. In my opinion, the ECB and WEF have signaled aggressive support and desire for developments of central bank digital currencies (CBDCs) as well as for more authoritarian policy measures of control for their constituents (what I see as vaccine passports and attempts at seizing lands held by their farmers, for starters). Over these past two years, I believe that Jerome Powell of the Federal Reserve had been providing aggressive resistance to the U.S.’s development of a CBDC, while the White House and Janet Yellen have ramped up pressures on the Fed to work on producing one, with Powell’s aversion to development of a CBDC seeming to wane in recent months against pressures from the Biden administration (I’m including Yellen in this as she has, in my opinion, been a clear extension of the White House).

It makes sense to me that the Fed would be hesitant to develop a CBDC, aside from being hesitant to employ any technology that is not understood, with the reasoning being that the U.S.’s major commercial banks share in ownership of the Federal Reserve System; a CBDC would completely destroy the function that commercial banks serve in providing a buffer between fiscal and monetary policy and the economic activity of average citizens and businesses. Which is precisely why, in my humble opinion, Yellen wants production of a CBDC; in order to gain control over economic activity from top to bottom, as well as to gain the ability to violate every citizens’ rights to privacy from the prying eyes of the government. Obviously, government entities can acquire this information today anyway, however, the bureaucracy we have currently can still serve as points of friction to acquiring said information, providing a veil of protection for the American citizen (although a potentially weak veil).

What this ultimately amounts to is; one, a furthering of the currency war that has been ensuing since the start of the pandemic, largely going underappreciated as the world has been distracted with the hot war occurring within Ukraine, and two, an attempt at further destruction of individual rights and freedoms both within, and outside of, the United States. China seems to be the furthest along in the world with regards to development of a sovereign power’s CBDC, and its implementation is much easier for it; it has had its social credit score system (SCS) active for multiple years now, making integration of such an authoritarian wet dream much easier, as the invasion of privacy and manipulation of the populace via the SCS is providing a foot in the door.

The reason I’m surprised that I did not hear this make it into discussion is that this adds a very, very important dynamic to the game theory of the decision making behind the Fed and Powell. If Powell understands the importance of maintaining the separation of central and commercial banks (which I believe he does), and if understands the importance of maintaining USD hegemony with regards to the U.S.’s power over foreign influence (which I believe he does), and he understands the desires for bad actors to have such perverse control over a population’s choices and economic activity via a CBDC (which I believe he might), he would therefore understand how important it is for the Fed to not only resist the implementation of a CBDC but he would also understand that, in order to protect freedom (both domestically and abroad), that this ideology of proliferation of freedom would require both an aversion to CBDC implementation and a subsequent destruction of competition against the USD.

It’s also important to understand that the U.S. is not necessarily concerned with the USD gaining too much power because we largely import the majority of our goods — we export USD. In my opinion, what follows is that the U.S. utilizes the crescendo of this power vacuum in an attempt to gobble up and consolidate the globe’s resources and build out the necessary infrastructure to expand our capabilities, returning the U.S. as a producer of high quality goods.

This Is Where I May Lose You

This therefore opens up a real opportunity for the U.S. to further its power… with the official adoption of bitcoin. Very few discuss this, and even fewer may recall, but the FDIC went around probing for information and comment in its exploration of how banks could hold “crypto” assets on their balance sheets. When these entities say “crypto,” they more often than not mean bitcoin — the problem is that the general populace’s ignorance of Bitcoin’s operations cause them to see bitcoin as “risky” when aligning with the asset, as far as public relations are concerned. What’s even more interesting is that we have not heard a peep out of them since… leading me to believe that my thesis may be more likely to be correct than not.

If my reading of Powell’s situation were correct, and this all were to play out, the U.S. would be placed in a very powerful position. The U.S. is also incentivized to follow this strategy as our gold reserves have been dramatically depleted since World War II, with China and Russia both holding signficant coffers of the precious metal. Then there’s the fact that bitcoin is still very early in its adoption with regards to utilization across the globe and institutional interest only just beginning.

If the U.S. wants to avoid going down in history books as just another Roman Empire, it would behoove it to take these things very, very seriously. But, and this is the most important aspect to consider,I assure you that I have likely misread the environment.

Additional Resources

This is a guest post by Mike Hobart. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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Dollar Slump Halted as Stocks and Bonds Retreat

Overview: Hopes that the global tightening cycle is entering its last phase supplied the fodder for a continued dramatic rally in equities and bonds….



Overview: Hopes that the global tightening cycle is entering its last phase supplied the fodder for a continued dramatic rally in equities and bonds. The euro traded at par for the first time in two weeks, while sterling reached almost $1.1490, its highest since September 15. The US 10-year yield has fallen by 45 bp in the past five sessions. Yet, the scar tissue from the last bear market rally is still fresh and US equity futures are lower after the S&P 500 had its best two days since 2020. Europe’s Stoxx 600, which has gained more than 5% its three-day rally is more around 0.9% lower in late morning turnover. The large Asia-Pacific bourses advanced, led by a nearly 6% rally in Hong Kong as it returned from holiday. Similarly, the bond market, which rallied with stocks, has sold off. The US 10-year yield is up around seven basis points to 3.70%, while European yields are 7-14 bp higher. Peripheral premiums are also widening. The dollar is firmer against most G10 currencies, with the New Zealand dollar holding its own after the central bank delivered was seems to be a hawkish 50 bp hike. Emerging market currencies are mostly lower, including Poland where the central bank is expected to deliver a 25 bp hike shortly. After rising to $1730 yesterday, gold is offered and could ease back toward $1700 near-term. December WTI is consolidating after rallying around 8.5% earlier this week as the OPEC+ decision is awaited. Speculation over a large nominal cut helped lift prices. US and European natural gas prices are softer today. Iron ore is extended yesterday’s gains, while December copper is paring yesterday’s 2.35% gain. December wheat is off for a third session, and if sustained, would be the longest losing streak since mid-August.  

Asia Pacific

The Reserve Bank of New Zealand quickly laid to rest ideas that the Reserve Bank of Australia's decision to hike only a quarter of a point yesterday instead of a half-point was representative of a broader development. It told us nothing about anything outside of Australia. The RBNZ delivered the expected 50 bp increase and acknowledged it had considered a 75 bp move. In addition, it signaled further tightening would be delivered. It meets next on November 23, and the market has more than an 85% chance of another 50 bp hike discounted.

Both Australia and Japan's final service and composite PMI were revised higher in the final reading. Japan's service PMI was tweaked to 52.2 from 51.9. It was 49.5 in August. Similarly, the composite is at 51.0, up from 50.9 flash reading and 49.4 in August. In Australia, the service and composite PMI were at 50.2 in August. The flash estimate put it at 50.4 and 50.8, respectively. The final reading is 50.6 and 50.9 for the service and composite PMI.

Softer US yields weighed on the dollar against the yen. On Monday, it briefly traded above JPY145. Today, it traded at a seven-day low, slightly above JPY143.50. US yields are firmer, and the greenback has recovered and traded above JPY144.50 in early European turnover. The intraday momentum indicators are getting stretched, and the JPY144.75 area may cap it today. The Australian dollar traded to almost $.06550 yesterday but has struggled to sustain upticks over $0.6520 today. Initial support is seen in the $0.6450-60 area. Trade figures are out tomorrow. The New Zealand dollar initially rose to slightly through $0.5800 on the back of the hike but has succumbed to the greenback's strength. It returned little changed levels around $0.5730 before finding a bid in Europe. The US dollar reached CNH7.2675 last week and finished last week near CNH7.1420. It fell to almost CNH7.01 today and bounced smartly. A near-term low look to be in place, a modest dollar recovery seems likely. 


UK Prime Minister Truss will speak at the Tory Party Conference as the North American session gets under way. We argued that calling retaining the 45% highest marginal tax rate a "U-turn" was an exaggeration and misreading of the new government. It was the most controversial part of the mini budget apparently among the Tory MPs. This was a strategic retreat and a small price to pay for the other 98% of Kwarteng's announcement. Bringing forward the November 23 "medium-term fiscal plan" (still to be confirmed with specifics) is more about process than substance. The fact that she seems to be considering not making good her Tory predecessor pledge to link welfare payments to inflation suggests she has not been chastened by the cold bath reception to her government's first actions. However, on another front, Truss is changing her stance. As Foreign Secretary she drafted legislation that overrode the Northern Ireland Protocol unilaterally. In a more profound shift, she has abandoned the legislation and UK-EU talks resumed this week Truss is hopeful for a deal in the spring. Lastly, we note that the UK service and composite PMI were revised to show smaller deterioration from August. The service PMI is at 50 not 49.2 as the flash estimate had it. It was at 50.9 previously. The composite remains below 50 at 49.1, but the preliminary estimate had it at 48.4 from 49.6 in August. 

Germany's announcement of the weekend of a 200 bln euro off-budget "defensive shield" has spurred more rancor in Europe. Not all countries have the fiscal space of Germany. Two EC Commissioners called for an EU budget response. They seem to look at the 1.8 trillion-euro joint debt program (Next Generation fund) as precedent. This is, of course, the issue. During the pandemic, some suggested this was a key breakthrough for fiscal union, a congenital birth defect of EMU. However, this is exactly what the fight is about. If there is no joint action, the net result will likely be more fragmentation of the internal markets. Still, the creditor nations will resist, and Germany's Finance Minister Linder was first out of the shoot. While claiming to be open to other measures, Linder argued that challenge now is from supply shock, not demand. On the other hand, the European Parliament mandated that all mobile phones, tablets, and cameras are equipped with USB-C charge by the end of 2024. The costs savings is estimated to be around 250 mln euros a year. No fiscal union, partial banking, and monetary union, but a charger union.

The final PMI disappointed in the eurozone. The Big 4 preliminary readings were revised lower, suggesting conditions deteriorated further since the flash estimates. It was small change, but the direction was uniform. On the aggregate level, the service PMI was revised lower to 48.8 from 48.9 and 49.8 in August. The composite reading eased to 48.1 from 48.2 preliminary estimate and 48.9 in August. Italy and Spain, for which there is no flash report, were both weaker than expected, further below the 50 boom/bust level. France was the only one of these four that had a composite reading above 50 and improved from August. Separately, France reported a dramatic 2.4% rise in the August industrial output. The median forecast in Bloomberg's survey was for an unchanged report. Lastly, we note that Germany's August trade surplus was a quarter of the size that economists (median in the Bloomberg survey) expected at 1.2 bln euros instead of 4.7 bln. Adding insult to injury, the July balance was revised to 3.4 bln euros from 5.4 bln.

The euro stalled near $1.00 yesterday, the highest level since September 20. However, it has come back better offered today and fell slightly below $0.9925 in early European activity. Initial support is seen around $0.9900 and then $0.9840-50. The euro finished last week slightly above $0.9800. We suspect that market may consolidate broadly now ahead of Friday's US jobs report. The euro's gains seem more a function of short covering than bottom picking. Sterling edged a little closer to $1.15 but could not push through and has been setback to about $1.1380. The intraday momentum indicators allow for a bit more slippage and the next support area is around $1.1350.


Fed Chair Powell has explained that for inflation, one number, the PCE deflator best captures the price pressures. However, he says, the labor market has many dimensions and no one number does it justice. Weekly initial jobless claims fell to five-month lows in late September. On the other hand, the ISM manufacturing employment index fell below the 50 boom/bust level for the fourth month in the past five. The JOLTS report showed the labor market easing, with job openings falling by nearly a million to its lowest level in 14 months. Yet, despite the talk about the Reserve Bank of Australia's smaller cut as some kind of tell of Fed policy (eye roll) and the drop in JOLTS, the fact of the matter is that the market view of the trajectory of Fed policy has not changed. Specifically, the probability of a 75 bp hike is almost 77% at yesterday's settlement, which is the most since last Monday. The terminal rate is still seen in 

Attention may turn to the ADP report due today but recall that they have changed their model and explicitly said that it is not meant to forecast the national figures. Those are due Friday. Also, along with the ADP data, the US reports the August trade figures today. We are concerned that the US trade deficit will deteriorate again and note that dollar is at extreme levels of valuation on the OECD's purchasing power parity model. That may be a 2023 story. What counts for GDP, of course, is the real trade balance, and in July it was at its lowest level since last October. Despite the strong dollar, US goods exports reached a record in July. Imports fell to a five-month low, which, at least in part, seems to reflect the difficult in many consumer businesses in managing inventories. The final PMI reading is unlikely to draw much attention. The preliminary reading had the composite rising for the first time in six months but still below the 50 at 49.3. The ISM services offer new information. The risk seems to be on the downside of the median forecast for 56.0 from 56.9.

Yesterday, we mistakenly said that would report is August building permits and trade figure, but they are out today. Permits, which likely fell for the third straight month, as the tighter monetary policy bits. The combination of slowing world growth and softer commodity prices warns the best of the positive terms-of-trade shock is behind it. The trade surplus is expected to fall for the second consecutive month. Even before the RBA delivered the 25 bp rate hike, the market had been downgrading the probability of a half-point move from the Bank of Canada. Last Thursday, the swaps market had it as a 92% chance. At the close Monday, it had been downgraded to a little less 72%. Yesterday, it slipped slightly below 65%. Further softening appears to be taking place today, even after the RBNZ's 50 bp hike. The odds have slipped below 50% in the swaps market.

After finishing last week slightly above CAD1.38, the US dollar has been sold to nearly CAD1.35 yesterday. No follow-through selling has been seen and the greenback was bid back to CAD1.3585. The Canadian dollar has fallen out of favor today as US equity index futures are paring gains after two strong advances. There may be scope for CAD1.3630 today if the sale of US equities resumes. The greenback has found a base around MXN19.95. The risk-off mod can lift it back toward MXN20.10-15. Look for the dollar to also recover more against the Brazilian real after bouncing off the BRL5.11 area yesterday.



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Spread & Containment

Plunging pound and crumbling confidence: How the new UK government stumbled into a political and financial crisis of its own making

Liz Truss took over as prime minister with an ambitious plan to cut taxes by the most since 1972 – investors balked after it wasn’t clear how she would…



The hard hats likely came in handy recently for Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng. Stefan Rousseau/Pool Photo via AP

The new British government is off to a very rocky start – after stumbling through an economic and financial crisis of its own making.

Just a few weeks into its term on Sept. 23, 2022, Prime Minister Liz Truss’ government released a so-called mini-budget that proposed £161 billion – about US$184 billion at today’s rate – in new spending and the biggest tax cuts in half a century, with the benefits mainly going to Britain’s top earners. The aim was to jump-start growth in an economy on the verge of recession, but the government didn’t indicate how it would pay for it – or provide evidence that the spending and tax cuts would actually work.

Financial markets reacted badly, prompting interest rates to soar and the pound to plunge to the lowest level against the dollar since 1985. The Bank of England was forced to gobble up government bonds to avoid a financial crisis.

After days of defending the plan, the government did a U-turn of sorts on Oct. 3 by scrapping the most controversial component of the budget – elimination of its top 45% tax rate on high earners. This calmed markets, leading to a rally in the pound and government bonds.

As a finance professor who tracks markets closely, I believe at the heart of this mini-crisis over the mini-budget was a lack of confidence – and now a lack of credibility.

A looming recession

Truss’ government inherited a troubled economy.

Growth has been sluggish, with the latest quarterly figure at 0.2%. The Bank of England predicts the U.K. will soon enter a recession that could last until 2024. The latest data on U.K. manufacturing shows the sector is contracting.

Consumer confidence is at its lowest level ever as soaring inflation – currently at an annualized pace of 9.9% – drives up the cost of living, especially for food and fuel. At the same time, real, inflation-adjusted wages are falling by a record amount, or around 3%.

It’s important to note that many countries in the world, including the U.S. and in mainland Europe, are experiencing the same problems of low growth and high inflation. But rumblings in the background in the U.K. are also other weaknesses.

Since the financial crisis of 2008, the U.K. has suffered from lower productivity compared with other major economies. Business investment plateaued after Brexit in 2016 – when a slim majority of voters chose to leave the European Union – and remains significantly below pre-COVID-19 levels. And the U.K. also consistently runs a balance of payments deficit, which means the country imports a lot more goods and services than it exports, with a trade deficit of over 5% of gross domestic product.

In other words, investors were already predisposed to view the long-term trajectory of the U.K. economy and the British pound in a negative light.

An ambitious agenda

Truss, who became prime minister on Sept. 6, 2022, also didn’t have a strong start politically.

The government of Boris Johnson lost the confidence of his party and the electorate after a series of scandals, including accusations he mishandled sexual abuse allegations and revelations about parties being held in government offices while the country was in lockdown.

Truss was not the preferred candidate of lawmakers in her own Conservative Party, who had the task of submitting two choices for the wider party membership to vote on. The rest of the party – dues-paying members of the general public – chose Truss. The lack of support from Conservative members of Parliament meant she wasn’t in a position of strength coming into the job.

Nonetheless, the new cabinet had an ambitious agenda of cutting taxes and deregulating energy and business.

Some of the decisions, laid out in the mini-budget, were expected, such as subsidies limiting higher energy prices, reversing an increase in social security taxes and a planned increase in the corporate tax rate.

But others, notably a plan to abolish the 45% tax rate on incomes over £150,000, were not anticipated by markets. Since there were no explicit spending cuts cited, funding for the £161 billion package was expected to come from selling more debt. There was also the threat that this would be paid for, in part, by lower welfare payments at a time when poorer Britons are suffering from the soaring cost of living. The fear of welfare cuts is putting more pressure on the Truss government.

a man in a brown stocking hat inspects souvenirs near a bunch of UK flags and other trinkets
The cost of living crisis in the U.K. has everyone looking for deals where they can. AP Photo/Kirsty Wigglesworth

A collapse in confidence

Even as the new U.K. Chancellor of the Exchequer Kwasi Kwarteng was presenting the mini-budget on Sept. 23, the British pound was already getting hammered. It sank from $1.13 the day before the proposal to as low as $1.03 in intraday trading on Sept. 26. Yields on 10-year government bonds, known as gilts, jumped from about 3.5% to 4.5% – the highest level since 2008 – in the same period.

The jump in rates prompted mortgage lenders to suspend deals with new customers, eventually offering them again at significantly higher borrowing costs. There were fears that this would lead to a crash in the housing market.

In addition, the drop in gilt prices led to a crisis in pension funds, putting them at risk of insolvency.

Many members of Truss’ party voiced opposition to the high levels of borrowing likely necessary to finance the tax cuts and spending and said they would vote against the package.

The International Monetary Fund, which bailed out the U.K. in 1976, even offered its figurative two cents on the tax cuts, urging the government to “reevaluate” the plan. The comments further spooked investors.

To prevent a broader crisis in financial markets, the Bank of England stepped in and pledged to purchase up to £65 billion in government bonds.

Besides causing investors to lose faith, the crisis also severely dented the public’s confidence in the U.K. government. The latest polls showed the opposition Labour Party enjoying a 24-point lead, on average, over the Conservatives.

So the government likely had little choice but to reverse course and drop the most controversial part of the plan, the abolition of the 45% tax rate. The pound recovered its losses. The recovery in gilts was more modest, with bonds still trading at elevated levels.

Putting this all together, less than a month into the job, Truss has lost confidence – and credibility – with international investors, voters and her own party. And all this over a “mini-budget” – the full budget isn’t due until November 2022. It suggests the U.K.‘s troubles are far from over, a view echoed by credit rating agencies.

David McMillan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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