As sterling falls, the IMF intervenes and the stock market falls, Dominic Alexander looks at the impact of the Tory budget for the rich

A disorderly retreat from last Friday’s ‘expansionary’ budget has begun. The reaction of the markets has been severe, with the pound sterling falling towards parity with the dollar, and the FTSE 100 falling below 7000 points. The FTSE 250, which is weighted more towards British-based firms than the 100 list, has been tending downwards all year, but has lost over 1.3 thousand points since Kwarteng’s announcements on 23 September. That is a very sharp fall.

An even worse impact has been the rapid rise in the cost of government long-term borrowing, with interest on its long-term bonds soaring up to 5%, the highest since 2008. This shows that there is a lack of confidence in the government’s ability to sustain its payment of debts. Investors therefore require a greater reward for the risk of buying gilts (loans to the government) that don’t need to be paid back over the short term.

Today, the Bank of England has had to make an emergency intervention to prevent further financial meltdown, including apparently a potentially cataclysmic run on pension funds. This appears to reverse the position it wanted to take as little time ago as on Monday, when there were expectations that it would raise interest rates to compensate for the inflationary nature of Friday’s budget. As it happened, the BoE did not, merely trying to reassure the markets that it would assess the situation in November. That announcement was judged as having ‘calmed’ the markets then, but only a couple of days later, it was clear that it was not enough.

Thus the Bank has made a screeching U-turn on its policy to ‘unwind’ quantitative easing, which it adopted in February this year. This means that from gradually lowering its holdings of government debt, it has started buying it up again, although it has restricted its intervention to long-term bonds (‘thirty-year gilts’). At the time of writing, this appears to have calmed the bond markets, but has had less of an impact on trading in sterling. We can only wait and see whether this on its own is enough to stabilise market confidence even in the short term. If it does, it will leave the government until November to come up with solutions, but if it does not, they will have to abandon one or more parts of the ‘plan for growth’ sooner.

Quantitative easing in perspective

The reversal of the BoE’s approach to quantitative easing underlines the scale of the current emergency. Quantitative easing is sometimes seen as a near equivalent to a government printing money, since effectively it is one arm of the state creating money in the form of government debt which it then buys up itself. The policy was adopted by almost all developed economies from the crisis of 2008 onwards, initially in order to make credit flow across the economy after the seizing up of the whole financial system. It was being maintained thereafter in an attempt to get banks investing again in the economy, essentially by giving them free money.

The policy had limited success, in that it stemmed the immediate crisis, but the banks did little to invest the money flowing to them, preferring to hoard it instead. Growth rates remained feeble in most advanced economies, and more quantitative easing kept being needed to stop recession from coming back. Each time national banks, whether in the US or elsewhere, hinted that they were intending to wind it down, stock markets began to fall. The policy is also supposed to be inflationary, in that it adds extra money into the system, so it was one way of tackling the deflationary forces at work in the aftermath of the crash of 2007-8. However, once inflationary conditions did finally start to return, national banks began to ‘unwind’ their holdings, in what is called quantitative tightening. In the UK, this meant that as bonds expired, the Bank would not buy them back again. This was to be a gentle slowing down of the policy; rather than actively selling its government debt, it was to reduce its holdings passively in this way.

For the Bank to have reversed this policy, the decision apparently having been made between this Monday and Wednesday, indicates a level of urgency, or even panic perhaps, that is surprising at the least. It certainly reveals a stunning lack of co-ordination between the government and the Bank over Friday’s ‘fiscal event’, and a sense that the government did not expect this kind of reaction from the markets. As a solution, the resumption of QE will not help in controlling inflation, of course, so in itself, it will not help the government’s wider economic issues.

The prospect of rapid growth from Truss and Kwarteng’s budget for the rich is surely now dead in the water. The problem for the rest of us is that the pressure from the markets is for ‘fiscal rectitude’, which will mean a doubling-down on austerity, rather than useful government investment. Whichever faction of the ruling class wins out through this crisis, capitalism currently has no answers for the cost-of-living crisis. That answer must come from the widest possible social mobilisation, including the Peoples’ Assembly demonstrations on the 2 October and 5 November for a real economic alternative.