This article was meant to be a thoughtful look at whether this mini-budget will generate the growth it promised.
It had to be about whether it made sense to borrow so much money to finance tax breaks and whether this financial gamble (what a gamble it is) will actually work.
And in one respect it’s still about all those things, but in most respects it’s about the extraordinary response of the financial markets.
I can’t recall another fiscal event that has sparked a reaction like this: knock down very hard; gilt yields (the government’s cost of borrowing) rose more than any other day in modern records; stock markets are falling and money markets are pointing towards a painful rise Bank of England interest rates in the coming months.
It’s possible to dismiss all of this as the whining of the men in gray suits, except that this matters.
Think about it for a moment: the UK government has just committed to borrowing huge sums to finance a series of tax cuts. It has done so in the hope that this will generate extra growth and move Britain’s disappointing productivity trajectory to a new level.
There is some logic in this, and we can discuss whether today mini-budget had the right kinds of reforms, but what matters even more than any of that is being able to borrow all the money that comes back into the international capital markets.
And the message from these capital markets is not encouraging. The reason Treasury yields have risen so sharply is that investors believe we are a riskier proposition than we were tomorrow. They want to charge us higher interest rates the same way any lender does with a heavily indebted borrower.
But the direct result of that is in the hours after Quasi Quarteng sat down, this borrowed money of hundreds of billions of pounds immediately became much more expensive.
The fall in the pound is perhaps more worrying. Don’t get me wrong: we’ve had plenty of tough days for the pound before, and it’s nothing compared to the night of the EU referendum.
We survived it – albeit the pound never recovered – so why don’t we shake it off?
And indeed, in the coming days sterling may well rise and things will look a little less depressing.
Still, consider what these currency moves mean: that’s a lot of investors pulling their money out of this country, deciding not to allocate cash to the UK, pulling back rather than diving in.
If these investors were excited about the UK’s growth plan, you’d expect them to be part of it; you would expect them to start allocating cash to UK investment; instead, the opposite seems to be happening.
In short, the verdict is not very encouraging. No other budget in modern times has seen a reaction like this. Perhaps the closest analogy is the budget this has already been compared to: Anthony Barber’s 1972 budget.
It was another attempt to boost economic growth a few years ahead of an election; it ended badly, with a monetary and fiscal crisis, and inflation sky high to double digits.
Now, in some respects, the territory is very different today than it was in the 1970s. First, the pound is floating happily, while it was tumbling around the end of the Bretton Woods era in the early 1970s.
In fact, you could argue that today’s fall in the pound is a sign of success: as times change, our currency adapts. And another difference is that the treasury no longer determines the interest rates; those are being put across town by the independent Bank of England.
But here things get uncomfortable again. The bank is obliged to try to ensure financial stability. It is the guardian of the pound.
If the pound continues to fall, it is not out of the question for the bank to increase interest rates. Some economists believe this could happen as early as next week; it is actually quite highly priced by the money markets.
These markets are betting that interest rates will reach 5.5% next year. That’s almost a percentage point higher than they expected before Mr Kwarteng stood down.
Read more about the mini-budget:
Interest rates at those levels would be higher — once you adjust for people’s mortgage debt — than anything we’ve seen since the late 1980s, when the housing market was headed for the biggest crash in modern times.
This is not a happy precedent, but it is what the markets are now betting on.
The next few days may be bumpy. The hope is that the pound will rise in the coming weeks, but there is also a chance that it will continue to fall. It is not yet a crisis. But it doesn’t look particularly good.