Ray Dalio added his name to a growing list of critics of the UK’s new spending plan, unveiled last week by Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng.
The billionaire investor, who founded what is now the world’s biggest hedge fund, Bridgewater Associates, in 1975, argued that the plan’s aggressive tax cuts would push Britain’s debts to unsustainable levels and cripple the pound
“Investors and policymakers: heed the lesson of the UK’s fiscal blunder,” Dalio wrote in a Tuesday. tweet. “The panic selling that you are seeing that is causing UK bonds, currency and financial assets to fall is due to the recognition that the large supply of debt that the government will have to sell is too much for demand.”
On Monday, in response to Truss’s new spending plan, the UK bond market experienced its biggest one-day sell-off in its history, pushing the total losses in the country’s stock and bond markets since Truss’ appointment as Prime Minister in September. From 5 to more than 500 billion dollars. Meanwhile, the pound sank to an all-time low of $1.05 against the US dollar on Monday morning, and although it has since risen to $1.07, the currency remains close to 40-year low against the dollar.
After Truss’ new spending plan was announced, the UK’s Debt Management Office said it would increase its debt issuance by £72.4bn for the current fiscal year to £234.1bn free.
The new spending plan will also increase the UK’s debt-to-GDP ratio to around 101%, the highest level of debt the UK has held since 1962, according to Deutsche Bank.
Deutsche Bank, UK Debt Management Office
According to Ray Dalio, this rapid increase in debt, coupled with the lack of demand for the pound on the world stage, is a recipe for disaster.
“This makes people want to get out of debt and out of the currency. I can’t understand how those behind this move didn’t get that. It suggests incompetence,” Dalio said. “Mechanistically, the UK government is operating like the government of an emerging country, it is producing too much debt in a currency for which there is not much global demand.”
The investor went on to argue that this should be a teaching moment for governments around the world not to increase their debts to unsustainable levels.
“I hope, but doubt, that other policymakers who are doing similar things … will recognize that they risk a similar outcome, and that investors will see that as well,” he said.
Analysts are also concerned that the UK’s new spending plan, designed to stimulate economic growth and help cushion the effects of high energy prices in the short term, could end up exacerbating inflation in the UK as a whole. And consumer prices already increased by 9.9% compared to a year ago in August.
“The government is trying to balance support for consumers and businesses with measures that could lead to higher inflation, while also trying to revitalize a stagnant economy,” said Giles Coghlan, chief market analyst at global forex broker HYCM. the fortune. “Such a large tax package could contribute to high prices in the medium to long term that could inflict further damage on an economy and currency already on its knees.”
The potential inflationary impact of the new spending plan has increased calls for the Bank of England (BoE) to raise interest rates sharply, with some economists even calling for the UK’s key interest rate to rise from 2.25% to 6% next year. .
This is bad news for UK landlords. Monthly mortgage rates will rise immediately for 2 million people on tracker or variable rate plans if the BoE goes ahead with its next rate hike. And another 1.8 million homeowners on fixed-rate deals will also be forced to pay significantly higher rates next year, according to UK Finance.
With the UK facing more interest rate rises, rising public debt, a falling pound and a European energy crisis, Deutsche Bank chief economist David Folkerts-Landau said he now believes that the country will experience a severe recession that will last three to four. quarters
“We’re looking at a recession that’s going to be deep and long,” he told Bloomberg on Tuesday. “It’s the price we have to pay for financial stability and to be on the right track.”
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