ALEX BRUMMER: Chill wind off the Atlantic

Only a week or so ago, the former chancellor Kwasi Kwarteng and Bank of England governor Andrew Bailey were in Washington being lectured by Janet Yellen, the International Monetary Fund and all and sundry about the irresponsibility of British fiscal policy. 

The message was that in the battle against inflation, monetary and fiscal policy should be heading in the same direction and independent institutions – in Britain’s case, the Office for Budget Responsibility (OBR) – should not be ignored. 

As compelling as this analysis is of why bond vigilantes chose to target the now defunct Liz Truss government, it showed great chutzpah. 

Concern: US Treasury Secretary Janet Yellen, who recently chastised Kwasi Kwarteng

As Britain backtracked on radical supply-side reforms – with a reversal of tax cuts and a pledge to submit its homework to the OBR by October 31 – confidence was unravelling in the more significant US bond market. 

The removal of what some critics dubbed the ‘muppet premium’ in Britain – the surge in gilt yields – saw American bond rates rise above those in the UK. This in spite of America’s extreme privilege of the dollar being the world’s main reserve currency. Big exporting nations, notably China and Japan, hold vast quantities of US Treasuries in their reserves. 

Global markets are playing catch-up with two aspects of US policy. In the run up to next month’s mid-term elections, President Biden and the Democrat-controlled Congress have been on a spending spree which makes the much condemned British mini-Budget look like chicken feed. 

Similarly, the prospect of the Federal Reserve dumping tens, if not hundreds, of billions of US Treasuries back into the American money markets – as the US central bank does its version of quantitative tightening (the reversal of money printing) – has spooked traders. 

After a short period when the spike in gilt yields meant they exceeded bond rates in the US, there has been a crossover. The yield on the closely followed 10-year Treasury bond climbed to 4.276 per cent, the highest level since the peak of the great financial crisis of 2008. Under the headline The UK Market Meltdown Could Be Headed Your Way, the Wall Street Journal opined that the much-disparaged Truss fiscal package, costed at £161billion over five years, is modest compared with the budgetary expansion in other advanced countries. 

The rapid tightening by central banks, a policy endorsed by the IMF, is starting to put strains on financial systems and governments around the globe. 

Yellen, having risen to her full five-foot height to chastise Kwarteng, now expresses concern about a lack of liquidity in the US money markets. 

There is bound to be a sense of schadenfreude about America’s comeuppance. It will be short-lived, because what happens in the US, as we learnt at the start of the great financial crisis in 2008 and the Covid19 lockdowns in March 2020, has a nasty habit of crossing the oceans.

Confidence trick 

One cannot blame the UK’s opposition parties for taking full advantage of the disgraceful chaos in the Tory party. Lib Dem leader Ed Davey accuses the Government of ‘trashing the economy’ and Labour’s Keir Starmer suggests the Tories ‘have lost control of the UK economy’. 

The political rhetoric may be justified, but one cannot but feel such remarks only exacerbate the nation’s problems by undermining faith in the UK. 

The latest weekly statistical bulletin from the Office for National Statistics shows that confidence is fragile but the country is not down and out.

Consumer data illustrates a growth in the number of sit-down diners, UK retail footfall and transactions in most Pret A Manger locations. 

The opposition may be screaming blue murder about gas prices, but they fell 8 per cent in the week ending October 16, are 28 per cent under 2021 levels (long before the Ukraine invasion) and 68 per cent below August 22, 2022 when all the talk was of the surging price cap (now abolished). 

Meanwhile, at the nation’s airports, flights in the same week reached 88pc of 2019 levels and that’s before half-term. 

Anecdotal evidence from retailers such as Marks & Spencer suggests that, in spite of the unseasonally mild weather, spending on items such as winter coats and sweaters is surprisingly brisk. 

The danger is that with so much talk of crisis from the politicians and media it becomes a self-fulfilling prophecy.

This post first appeared on Dailymail.co.uk