HAMISH MCRAE: By allowing surge in inflation, governments have in effect been filching money from savers – the markets have come to the rescue

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It was fast, brutal and effective. And it shows you where the power is in the world. The financial markets have decided that UK economic policy must change as they will not finance the increase in borrowing proposed by the Liz Truss government at any acceptable interest rate. So they forced her to change it. They also forced her to fire their chancellor, Kwasi Kwarteng, or who knows? – in fact, will put an end to her premiership.

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This is for the future. We now know that both of the great quotes from James Carville, who won the election of strategist Bill Clinton, are true. The most famous of them: “It’s the economy, dumbass.” If Liz Truss’s government does fall, it will be her management of the economy that will deliver the final blow.

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The other concerns the bond market. He said: “I used to think that if there was a reincarnation, I would like to come back as a president or a dad or a baseball player with a 400. But now I would like to return as a bond market. You can intimidate everyone.

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Bruised: By allowing inflation to spike, governments are essentially stealing money from savers.

Well, that was true in the 1990s when he said it, but it wasn’t really true after the financial crash of 2008-2009. The power the bond markets had over everyone was that if governments or companies needed to borrow, they had to do what the markets wanted or else they wouldn’t go bankrupt.

But after this crash, central banks invented two ideas: near-zero interest rates (below zero in Europe) and quantitative easing. If governments needed money, they forced central banks to print it for them.

This is already history. When I studied economics in Dublin in the 1960s, I was told that if central banks printed too much money, it would cause inflation. I was also taught that economic lags are uncertain and can be very long.

In this case, it took a decade for inflation to subside, but last year it did so with a vengeance. Result? The bond markets have regained their power. And on Friday they used it. They may want more blood. When the news leaked that Kwasi Kwarteng would be fired, the pound rose and, more importantly, the 10-year yield fell below 4%.

For several minutes, it fell to 3.95%, which is within 100% of the US Treasury bond equivalent. Then the news came that Jeremy Hunt would be the new Chancellor, and the rate climbed back above 4%, and by Friday’s close it was over 4.31%. Yes, US rates have gone up too, but the point is that the gap between US and UK yields has widened. So the markets are far from certain.

Many people will be disturbed by the fact that these anonymous things, the markets, are so powerful. What right do they have to dictate policy to elected politicians in established democracies? I see it a little differently, because they represent the collective interests of the savers of the world – ordinary people who save money for old age, for children, for unforeseen circumstances.

And they use those savings to invest in projects and businesses that will turn a profit, whether it be governments investing in roads and hospitals or companies developing new vaccines.

By allowing this spike in inflation, governments were essentially stealing money from savers, including from their pension funds, if those funds were invested in bonds.

Markets are imperfect, of course, and that doesn’t mean they’re idolized. It simply means that they provide vital control over governments that take financial risks with taxpayer money.

What has happened in the past few weeks may seem like very bad news for politicians who have been reminded of the limits of their power. But this is certainly very good news for investors.

I don’t know what will happen to this government, and it would be a shame if its sound growth-stimulating ideas were blown to smithereens by its macroeconomic stupidity. I also fear that investors have some difficult months ahead. But I feel more comfortable, financial discipline is being restored by the big players in the global bond markets.

Credit: www.thisismoney.co.uk /

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