Dr.Thomas (Special Correspondent)
UK inflation has hit double digits,marking a record 40-year high.The current crisis is that Britain is constantly increasing food costs,the risk of a recession, and the rising cost of living.
With the pound at an all-time low versus the dollar, the UK seems to be amid a financial catastrophe.
Three ruptures in the natural gas pipelines from Russia to Europe through the North Stream are suspected of having been caused with sabotaging intent.
Britain has proposed an 80% increase in energy and gas prices, further exacerbating the country’s present cost of living issue.
Inflation in the United Kingdom has reached a 40-year high of 9.9 percent;energy prices have risen by almost 100 percent despite government capping;and the pound’s value has dropped by 24 percent against the dollar, making it one of the worst-performing currencies in the world.
On top of all this, the newly elected Prime Ministers came up with something disastrous to fix the economy.
What exactly is wrong with the United Kingdom that its economy has collapsed? This tale begins on September 20, 2022,when three major events had already occurred:
The Russians had wholly cut off gas, causing electricity prices to skyrocket by almost 100%.
Winter was approaching for Europe, causing energy consumption to reach new peaks from September through December.
Even if Europe had 90% of its storage complete as of September, it would take only 90% of that to get through the winter.
Production and inflation costs have reached a record high of 9.9 percent because of the soaring gas price despite aid from the United States and other nations.
This is where,on September 20, 2022,the prime ministers of the United Kingdom unveiled a “Mini-Budget” program to address the country’s energy and economic crises; the suggestions included were so alarming that they jolted the UK economy.
It’s essential to understand what’s wrong with these policies and how they’ve contributed to the escalation of the crisis.
Well, we will start with the energy policies of the United Kingdom since, much as grocery stores mark the price of milk before selling it to customers,power companies mark up the cost of electricity after purchasing it cheaply from gas and oil suppliers.
The price ceiling applies to everyone, regardless of income level, and the power firms’ losses over the next two years will have to be covered by loans from the banks.
The logic behind raising the price of energy, as claimed by the governments, was to encourage the reduced use of power.
The amateurish government officials were of the impression that UK residents will be exempt from paying the huge numbers reflected on their energy bills regardless of whether or not prices rise.But that was not the case,was it?
Since energy expense is a relatively small part of the wealthier households’budgets,charging everyone the same per-kilowatt rate is terrible economics.
Now that everyone, rich and poor, must pay the same price regardless of consumption, three massive catastrophes are on the table.
First, everyone will be subject to the same rates regardless of whether they use electricity for essentials like heating a home or frivolous things like heating a Jacuzzi.
Consequently, this will be a significant burden on the poor, given the current exponential increase in the price of electricity.
As a result, the wealthy and the ultra-wealthy will continue to use much more energy than is necessary.
Because there is no penalty for this, the government will continue to get no more revenue.
For this reason, a variable slab system was recommended by the National Institute of Economic and Social Research.
Since this approach is not being used in the UK, experts predict that the government will have to spend a fortune making up for the losses of the affluent.The issue arises when they plan on sourcing such a massive sum of money.
They’ll resort to bonds, but that means the UK is on the verge of a bond crisis, which in turn might lead to a currency crisis.
This could inevitably lead to a mortgage crisis, and further lead to a banking crisis, and so on.
Here’s where the UK runs into a second issue: currency devaluation, which renders the UK bond market essentially worthless to large traders. Looking at the UK market today, the pound’s value has dropped by roughly 21.4 percent since January, resulting in an exchange rate of only 1.1. This makes the currency carry rate a disaster for consumers.
Although the bonds now earn 4%, the pound’s depreciation has made investing in the UK market a nightmare for investors.
Consequently, investors are fleeing the market, reducing pound demand and hastening the pound’s decline.
Because of this, energy costs are rising rapidly as more people try to pay their increasing energy bills.
What will happen is that the UK government will have to borrow more money to make up for these losses, leading to an oversupply of bonds on the market and a subsequent increase in the interest rates on those bonds.
The administration has promised tax cuts estimated to reduce government income by $45 billion through 2026, which means the cost of borrowing will rise, and the currency will depreciate more.
People are worried that the UK economy may collapse because the government is lowering its earnings amid a liquidity shortage.
The combination of this with the inevitable increase in the cost of housing brought on by inflation and the inevitable rise in the number of bankruptcies will lead to a crisis in the financial sector, the housing market, and the energy and currency markets.
UK may either relax by lifting sanctions and buying gas from Russia or struggle by depending on the US and praying they don’t mess up economically.
