2. usually prompted by perception of what the electorate want, which is not always fiscal coherence. in this case prompted by ideology, or delusion, hope.
3. markets, who are going to be the ones the government come to to borrow to plug the hole between spending and revenues, think - what is your exit plan? You don't seem to have one. You cannot pile debt up indefinitely.
4. why not? because that debt has to be serviced with interest, either as a discount on the loan up front, or explicitly. it has to be rolled over too and refinanced.
5. concern rises that the government won't be able to service the debt at some point; higher level concern arises about others' concern [and so on]. the interest rate charged today, well ahead of time before any debt limit is reached, rises.
6. it rises because a small premium gets built in to compensate the investor/lender for the chance that the exit is a messy default [or a messy high inflation to lower the real value of the debt]. Not necessarily a high probability event, but could happen.
7. that increase in interest rates increases the hole between spending and revenue because one component of spending is spending on interest.
8. this makes the fiscal situation look even worse, and brings forward the time when there would be an unholy reckoning if the government does not change course. so interest rises a bit more as the chance of a default has gone up a bit more. and so on.
Dampening this viscious cycle is the chance of a change of government or the Tories deposing Truss and Kwarteng before time. Amplifying it is the threat of a trade war, which would, if it crystallized, tank government revenues and increase spending.
Also amplifying is the issue of exactly what the energy support package will cost, and how the government will exit it.
I haven't spoken about the banks. [h/t @Dr Alexander Apostolides] Banks often feature in these crises, whether they are the trigger or not.
The rise in the cost of government finance is a fall in the value of government bonds. Either because it seemed worth it, or they were told to, or reckless, banks sometimes find themselves holding a lot of these bonds, and this fall can start to put them into difficulty.
Compounded by the fact that the rise in the cost of finance has to be passed on and this puts some of the companies and housesholds they loaned money to into difficulty, raising the possibility of default, and the need for a fire sale of an collateral.
This can make depositors concerned. And it will make markets even more concerned about government finances because the government either explicitly or implicitly stands behind the banks' deposits; which it may not be able to afford [see Ireland].
UK banks are in good shape. Now. But not entirely invulnerable. Provided markets see a clear exit, and soon enough, either through this government reversing course, or it being highly likely to be thrown out, the viscious cycle should not build enough to bring banks into it.
For the interests of the country at large, it would be great to have clarity and detail on how Labour would undo this mess [leave aside what else they might do, redistribution, other funded changes]. That would lower the risks of this getting nasty.
But obviously they have their own electoral interests which might not coincide. It might be better for them to allow things to get at least a little bit crazy so that the electorate can see just what bad economics can do to you.
Likewise any faction in the Tory party that finds fiscal irresponsibility disagreeable should organize and clarify what it would do differently, and allow us - and markets - to assess its influence over the course of the events.
Time for, surely, the Deficit Research Group?
Economist. Ex Prof / central banker. NS/Indy/FT/Guardian/Prospect/Times/Tortoise/Byline Times / even academic econ journals. Mostly just tweeting.
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