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On Tuesday afternoon in the City of London, a helicopter flew overhead several times. Perhaps it was a news helicopter, waiting to capture scenes of traumatized traders emerging from their offices in shock and despair.
The crew would have left empty-handed, but the quiet streets belied the inner turmoil. Markets in Britain, the world’s fifth or sixth largest economy, were turning in a way even grizzled veterans had never seen before.
The markets were on fire. The pound hit a record low, rebounded, fell again. Long-term government bonds fell in value. Buyers ran for protection and pension funds began to sweat on their dwindling balance sheets.
Armed with taxpayer compensation, the Bank of England turned its financial fire hose on the “dysfunctional” market on Wednesday, with a £65bn bond-buying programme. The first installment of £1 billion was enough to put out the fire in the gilt market.
Chancellor Kwasi Kwarteng kindled the tinder of this conflagration in his “mini-budget” the previous Friday.
It wasn’t so much the £45billion ($76billion) a year in tax cuts he had promised, or the £72billion a year of extra debt needed to fund them. It was the absence of any idea when, or how, he planned to pay for his bout of tax extravagance.
Two days later, as he promised his mini-budget was just a prelude to more tax cuts to come, Britain’s most ardent free-trader was hoisted to his own market .
On Monday, as markets wobbled, he said he would put a plan in place to control the public debt burden – but not before November 23. The Bank of England, meanwhile, said it would have to raise interest rates to counter the fiscal stimulus – but not before November 3.
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