Europe in Crisis with Lyn Alden

 
 

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“This period looks a lot like the 1940s, which is when you have a combination of high debt and high inflation, which is not what you had in the 70s. In the 70s they had low debt and high inflation, which means they had a lot more tools to respond to it…when you have that combination of both…that’s the closest thing that a central bank has to a checkmate scenario, where there’s only bad options.”
— Lyn Alden

SHOW DESCRIPTION

Lyn Alden is a macroeconomist and investment strategist. In this interview, we discuss the recent market turmoil that followed the UK government's proposed tax cuts. Why did the market reaction nearly result in the collapse of UK pension funds? What are the underlying issues? Where are we heading?

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Liz Truss became the UK’s new Prime Minister on the 6th of September. She immediately worked to develop a financial package that would protect people from unprecedented hikes in energy prices. At the same time, Truss was keen to implement a long-held economic ideology predicated on stimulating growth through low taxes and reduced regulatory burdens.

A political judgement was made to prioritise promulgating tax cuts ahead of any assessment of what spending cuts would be required to balance the budget; a huge emergency fiscal package was being combined with reductions in revenue. In the absence of any other information, the market took fright: the government wasn’t deemed to be in control of a burgeoning debt pile.

Immediately following the government announcement, the bond interest rates rose sharply whilst the British pound dropped precipitously. Despite government protests that the market response was due to external factors, the messaging was clear: the UK economy is becoming dangerously unbalanced. Within days the Bank of England had to react and start a £65 billion purchase programme to save a number of pension funds from collapse.

So, what actually happened? Experts, commentators and politicians have argued about the causes and outlook, whilst mortgage rates have rocketed such that emergency payments for energy costs will be dwarfed by additional mortgage payments. Is the UK economy at risk? If so, why, and what is the outlook? Does history teach us anything? And, fundamentally, can debt be brought back under control?

TIMESTAMPS

00:01:34: Introductions
00:02:20: Lyn's book
00:03:10: The combination of UK economic issues
00:13:02: A mini Weimar, and hyperinflation vs high inflation
00:19:37: Japan's economic stagflation
00:23:59: The risk of the UK defaulting
00:25:45: Japan's Abenomics
00:27:36: UK pension funds crisis akin to the housing crisis
00:31:45: Weak pound and global currencies
00:34:50: The strength of the US dollar
00:47:30: Echoes of 1940s but with energy shortages
00:52:30: Risks of pivoting to the dollar
00:58:45: The importance of low energy costs
01:02:24: Final comments

 

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SHOW NOTES

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