Europe in Crisis with Lyn Alden

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Jeff Brown The Near Future Report

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Lyn Alden, a macroeconomist as well as an investment strategist, is Lyn. We discuss the market turmoil that erupted following the UK government’s tax cuts. What caused the near collapse of UK pension funds due to the market reaction? What are the root causes? Which direction are we going?

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TIMESTAMPS:
00: 00: 00 Lyn’s working on a book
00: 01: 48 UK’s toxic combo: high debt + inflation
00: 14: 35 Japan’s & Abenomics; could the UK default?
00: 22: 34 Pension funds, leverage & sovereign debt
00: 26: 42 Global currency weakness vs the dollar
00: 34: 00 Echoes of 1940s but with energy shortages
00: 43: 37 Risks of pivoting into the dollar
00: 50: 06 The importance of low energy costs

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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

Lyn Alden, a macroeconomist as well as an investment strategist, is Lyn. We discuss the market turmoil that erupted following the UK government’s tax cuts. What caused the near collapse of UK pension funds due to the market reaction? What are the root causes? Which direction are we going?

– – – –

On the 6th September, Liz Truss was elected the UK’s Prime Minister. She worked immediately to create a financial package that would protect people against unprecedented rises in energy prices. Truss also wanted to implement an economic ideology that emphasized stimulating growth through lower taxes and reduced regulatory burdens.

Political judgment was made to prioritize tax cuts over any evaluation of the spending cuts required to balance the budget. A huge emergency fiscal package was combined with revenue reductions. The market panicked because there was no other information: the government was not deemed to have control over a growing debt pile.

The bond interest rates rose rapidly immediately after the announcement by the government, while the British pound plunged precipitously. Despite protestations by the government that the market reaction was caused by external factors, the message was clear: The UK’s economy is rapidly becoming dangerously imbalanced. Within days the Bank of England had to react and start a PS65 billion purchase programme to save a number of pension funds from collapse.

What happened, then? While experts, politicians, and commentators have debated the causes and outlook of the crisis, mortgage rates have shot up to such an extent that additional mortgage payments will dwarf emergency payments for energy costs. Is the UK’s economy in danger? What is the outlook and why is it so? What can we learn from history? Can debt be brought under control again?