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The Pound Loses Weight After Brits Test Tax Cuts

Few world leaders have had such an uneventful start to their leadership as new United Kingdom Prime Minister Liz Truss. The new leader has received little attention, thanks to the global media coverage starring the country’s Monarchs — the death of Queen Elizabeth II and the ascendance of King Charles III to the Throne have captured the media’s attention.

Unfortunately, there can only be a dearth of Truss-related coverage for so long. As she enters week three of her new gig, she’s now the star of British media and global financial news because of an unpopular economic decision — tax cuts.

To Americans, tax cuts might sound like a dream come true. There haven’t been cuts like this in the United Kingdom since the 70s. However, the Conservative effort to tax cuts and boost economic activity sent stocks tumbling late last week. One of the UK’s most popular indexes, the FTSE 100, fell more than 3.8% on the week.

The reason? Cost. The UK expects to spend some £161 billion — that’s about $172 million — on the cuts and reforms over the next five years.

Stocks weren’t the only thing that fell. The British Pound, the country’s currency, fell to a record low against the dollar. The pound traded as low as $1.04 in early trading on Monday before recovering most of Monday losses. The currency is down nearly 8% on the month against the Dollar.

Truss Tests the Past, Present, and Future of Britain’s Economy

The Pound isn’t the only currency losing weight against the dollar, but Truss’s own policies to boost British growth to targets not seen in over a decade have become a short-term headwind. Truss, who is inspired by the economic policy of Margaret Thatcher and the “special” relationship the country has with the United States, wants a return to the GDP targets of days past — as KPMG’s Head of Tax Policy Tim Sarson said, it suggests “a return to the economics of the 1980s.”

To that effect, Truss is trying to revive the past growth by making broad changes which could stoke the UK economy — the hope is that the future growth of the UK depends on these tax cuts and higher interest rates to kill inflation. However, the market and Pound turning down reads as a rejection of this orthodoxy.

Why? Well, because of something pretty shocking: the Pound has lost nearly half its value against the Dollar since the 2008 Financial Crisis.

Naturally, the UK has faced many of the same ills that its European neighbors are facing in energy shortages, recession risk, inflation, and unemployment. It’s a recipe has created a lot of turnover in leadership in countries such as Italy and Sweden in recent weeks.

Even though Truss is only 20 days into her new Prime Minister position, she might be in Liz Trouble. She has inherited a small, recessionary disaster in the current UK, which is expected to see inflation as high as 11% YoY when the winter cold sets in, bringing higher energy costs — and cash-strapped Britons facing other expenses are unlikely to spare her from criticism, especially as the Pound and other British assets sink.

The Pound is down 3.8% against the Euro, down 6% against the Swiss Franc, and down 7% against the dollar just since she took office, emblematic of the kind of pedigree that a traditional Thatcherite fetches from the modern investor.

Why it Matters: The Bank of England Will Respond

Truss’s opponents in the Labour Party will try to capitalize from a weak start to her leadership, a story for another time — because the real story is that the economic leaders at the Bank of England will ultimately have to make do with what they’ve been handed. The UK 10-year bond yield has risen at a pace not seen since at least 1957, a suggestion that the Bank of England will pull an emergency rate hike out to calm market anxieties and cull fears of flight from the Pound.

What does this mean for Americans, practically speaking? Well, naturally Americans win when their currency rises against other currencies — but it means instability in countries, allies or enemy. That also means that Americans, who are generally sitting on an allocation of international and emerging market stocks, will be unsettled to see those parts of their 401(K)s getting hammered.

And what does it mean for you? Why should you care? Well, there’s more than profit in knowing about happenings both domestic and abroad — whether it’s the energy crisis in Europe; leadership changes in countries like the UK, Italy, and Sweden; unrest in Sri Lanka and Iran; or Hurricanes in the Atlantic. Simply put, the more you learn, the more you can earn.

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