To The Moon

The market is scared by the news of UK,

The UK government unveiled a £45 bn tax cut, including scrapping plans to raise corporation tax to 25 percent, scrapping the top rate of 45 percent, slashing stamp duty and more.

Tax cut is one of the most typical expansion fiscal policies. Generally, when the economy deteriorates, it is often led by the government(The central bank is responsible for monetary policy).

The new British Prime Minister Liz Truss, who successfullys end off the Queen, made her radical economic growth plan. Why? Obviously, The risk of recession is getting stronger and stronger.

Inflation,  Russia and Ukraine, makes the "stagflation" nearer.

I don't know if the "New Lady" would compete with "Iron Lady", but according to IFS, The UK government's borrowing may reach about 100 billion pounds a year in the future, 60 billion pounds higher than the forecast in March.

That's a lot.

UK's stimulation mainly starts from the "demand side", which will bring more intuitive consequences, such as

1. Intensify the risk of upward inflation;
2. Expand the deficit and increase the financial burden;
3. Conflict with monetary policy and reduce the effectiveness of monetary policy. (Raising interest rates adds loneliness)

In 1960s, Robert A. Mundell and J. Marcus Flemins put forward the Mundell-Fleming Model under the condition of open economy. Under this framework:

If inflation is constant in the short term, output is completely determined by aggregate demand, and capital can flow freely, tight monetary policy and loose fiscal policy,It can bring about the appreciation of the local currency

But we found that the opposite is true.

After the British government put forward this easing policy, the British pound directly broke the new low since 1985. Why?

1. The Mundell-Fleming model assumes that there is no inflation, but Now the CPI of UK just exceeded 10%. Moreover, this inflation is mainly imported inflation caused by rising raw material prices, which will break the balance of current account.

2. Not only increase the deficit, But also increases the burden on the government because of "raising interest rates".In 2020 and 2021, the UK's fiscal deficit ratio was 13.1% and 7.9% respectively, which was higher than the average level of 2.9% in 2015-2019. Isn't issuing bonds in the case of raising interest rates asking the government to pay higher interest rates in vain? This problem will gradually appear in the "euro zone" where interest rates are rising.

3.If fiscal policy is dominant, the central bank will be unable to do anything about inflation. The current situation in Britain is that the currency depreciation-the cost of importing increases-raises the domestic cost selling price; At the same time, fewer laborers and higher cost of living-demand wages, which is caught in the most worrying "wage-inflation" spiral.

In addition, investors sold a lot of British "stocks and bonds", and the most important thing was to fear its "uncertainty".

The British government has changed faster than expected. At present, Truss polls are not high, and there are great doubts about whether it can be re-elected in the next general election. If we can't deal with the current problems well, it will be difficult to win the election.Therefore, it will affect the coherence of policies.

It's a taboo for military strategists to change from time to time.

More importantly, Britain has started the fiscal stimulus. If more European countries follow suit, those European countries whose economic situation is far inferior to that of Britain and whose debt ratio is already very high may fall into a "debt crisis" again, leading to a global disaster.

$VANGUARD FTSE 100 UCITS ETF(VUKE.UK)$$Ishares MSCI United Kingdom ETF(EWU)$$FTSE AIM UK 50(.AIM5.UK)$$BP PLC(BP)$$英镑主连 2212(GBPmain)$$英镑/美元(GBPUSD.FOREX)$$Invesco CurrencyShares British Pound Sterling Trust(FXB)$$Invesco DB US Dollar Index Bullish Fund(UUP)$