rogoff228_Chris J RatcliffeGetty Images_pound low Chris J Ratcliffe/Getty Images

Britain Is Not an Emerging Market – Yet

In response to British Prime Minister Liz Truss’s “mini-budget,” financial markets have sent the pound spinning to its lowest level ever, with no bottom in sight. While talk of an outright UK default is overblown, it is not unreasonable to anticipate a painful reckoning just short of that outcome.

CAMBRIDGE – Following British Prime Minister Liz Truss’s “mini-budget” – a mishmash of policies ranging from Reaganomics-style tax cuts for corporations and the wealthy to an old-style socialist cap on energy prices – commentators have reacted with increasingly florid hyperbole. Many now wonder whether the United Kingdom is coming to resemble less an advanced economy than a wayward emerging market.

True, financial markets have sent the pound spinning to its lowest level ever (against the dollar), with no bottom in sight. The pound’s reserve-currency status, the last remaining vestige of Britain’s once-vaunted position at the center of the international monetary system, is being called into question. While talk of an outright UK default is overblown, it is not unreasonable to anticipate a painful reckoning just short of that outcome.

And it is worth remembering that the UK repeatedly took bailouts from the International Monetary Fund from the 1950s through the 1970s (making it the IMF’s most loyal customer). It would be naive to think that this could not happen again, especially if global long-term interest rates continue to return to their (very) long-run trend. No wonder the IMF is already pushing back against the UK’s half-baked economic package, just as it does for potential emerging-market claimants on its resources.

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