Why the market vetoed the U.K.’s budget–and what it means for the changing nature of stimulus around the world
Consider the following statement about the relationship between markets and policymakers: “(They) are separated by light years of distrust and misunderstanding.
These were the words of Stuart Eizenstat, advisor to President Jimmy Carter, about the hard lessons learned about his failed budget in early 1980 (he had to retract it) that could have been a warning to Prime Minister Liz Truss and chancellor of the Exchequer Kwasi Kwarteng.
The veto power of markets can easily offset the stimulus enacted by politicians, voting down policy efforts by tightening financial conditions through higher rates, lower currency, and lower stock prices.
The market rout in the U.K., an extraordinary rebuke by investors of a business-friendly but overreaching fiscal program, serves as a reminder that the reality of stimulus is changing before our eyes.
President Carter might have told Kwarteng that despite a desire to be bold, any plan must be acceptable to markets.
Carter’s budget was not nearly as dramatic as the U.K.’s (in fact, the market fire was triggered merely by a new government estimate of the deficit) but the U.S. inflation regime was already broken in 1980 with inflation expectations that were unanchored.
The future of the stimulus machine is in flux.
Yet, systemic stimulus to backstop the economy in times of crisis would still be possible.