Is a Depression Starting in the United Kingdom?

A frightening piece of 20th?century financial history could repeat itself in the United Kingdom.

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A near collapse of British pension funds triggered a financial crisis that could lead to a global recession or depression. To elaborate, on 23 September 2022, British pension funds began panic selling of UK government bonds or gilt.

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Falling gilt prices meant some pension funds could not cover their losses, The Washington Post?reports. Consequently, the Bank of England began buying gilt to shore up the price.

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British Pension Funds Almost Collapse

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Britain’s central bank bought the gilt because some final salary pension plans?were hours from collapse, CNBC reports. Many British retirees rely on such funds for income, so the middle class was at risk.

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The funds almost collapsed because they use a strategy called liability-driven investment (LDI) in which they keep no cash. Instead, the funds rely on credit to finance their operations. If credit dries up, LDI funds collapse.

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Ironically, British Prime Minister Liz Truss triggered the panic by announcing a new budget with massive tax cuts and spending increases. The budget scared investors who fear Her Majesty’s Government could be incapable of paying its debts.

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Is a Financial Collapse Beginning?

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Frighteningly, the British financial chaos is far from over. On 10 October 2022, the Bank of England conducted its third pension-fund bailout in two weeks, The Guardian?reports. Notably, the Old Lady of Threadneedle Street is buying ï¿¡5 billion worth of index funds to keep those assets from collapsing. This was in addition to ï¿¡65 billion in bonds already purchased.

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The ultimate fear is the pension fund hysteria will cause bank collapses and runs, driving ordinary people to flee the banking system. Pension fund collapses could be imminent because Bank of England Governor Andrew Bailey told pension fund managers they have three days to rebalance their positions?on 11 September 2022. Hence, a collapse could occur on Friday 14 October or Monday 17 October 2022.

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The greatest danger here is that the British contagion could spread to other countries such as the United States. Frighteningly, I think the current British crisis mirrors the situation at the beginning of the Great Depression.

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The Stock Market Crash began in the City of London

To elaborate, I think the Great?Stock Market Crash began in the City of London on 20 September 1929.

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British markets began crashing when the London Stock Exchange suspended trading shares of the Hatry Group. The Hatry Group was an investment scheme organized by silk trader-turned war profiteer turned financier Clarence Hatry. Hatry had become a stock market darling by buying up companies and forming one of the world’s first conglomerates.

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However, by August 1929 Hatry was out of money but kept trying to buy a steel company. After unsuccessfully begging the Bank of England for a bailout, Hatry obtained a $1 million loan using fake bearer scrip certificates (bearer bonds) as collateral. When the London Stock Exchange discovered the fraud, it stopped trading in Hatry’s shares.

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British stocks tumbled as panicking investors sold their shares. Scotland Yard arrested Hatry, who was convicted of forgery and fraud and sentenced to 14 years in prison in December 1929.

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The Hatry scandal coincided with the peaking of the US Dow Jones Industrial Average at 381?in September 1929. During the 1920s the Dow grew from 63 in August 1921. The Dow Jones never recovered from Hatry. It started falling until Black Tuesday 28 October 1929, when it fell by almost 12%.

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Is it 1929 All Over Again?

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This was the great Stock Market Crash that most historians view as the beginning of the Great Depression. The Dow Jones fell to a 20th?century low of 41.22 in summer 1932 and did not return to its pre-crash peak until November 1954. Over 25 years later. The Federal Reserve estimates the stock market lost 89% of its value during the depression.

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Interestingly, borrowing that resembles the LDI made the 1929 crash worse. To explain, many investors were margin buying stocks. In margin buying, used 10% collateral to buy stock. When the market crashed, many investors could not repay the loans which caused market activity to cease.

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Hence, the world could be on the verge of a 1929 level crash and few people notice. Once again, Mr. Market is proving the old saying that: “Those Who Do Not Learn History Are Doomed To Repeat It” could be true.