Paul Krugman, Mohamed El-Erian, and Nouriel Roubini are tearing into UK leaders whose spending plans upended markets. Here's what the 3 top economists have said.

Theron Mohamed
Thu, September 29, 2022 

Paul Krugman.Jeff Zelevansky/Getty Images

Paul Krugman, Mohamed El-Erian, and Nouriel Roubini blasted the new UK government's spending plans.


Prime Minister Liz Truss' planned tax cuts tanked the pound and spiked bond yields this week.


"Trussonomics is deeply stupid," Krugman said, while Roubini slammed policymakers as "clueless."

Paul Krugman, Nouriel Roubini, and Mohamed El-Erian have torn into the new British government's proposed tax cuts, and weighed in on the Bank of England's 65 billion pound ($70.5 billion) bond-buying plan.

Prime Minister Liz Truss and Chancellor Kwasi Karteng's proposals tanked the pound and roiled the UK pensions sector this week. They also prompted a warning from the International Monetary Fund, and spurred the BoE to buy long-dated government bonds and delay the start of its bond sales, in order to stabilize volatile markets and forestall a financial disaster.

Here's what the three leading economists have said about the fiasco:

Paul Krugman

"Trussonomics is deeply stupid," Krugman tweeted on Wednesday. "But there seems to be a lot of hyperventilating going on. Not, it won't cause a global crisis — for God's sake, Britain is only 3.2% of world GDP. And while British markets are a mess, we're a long way from 1976. Get a grip."

The Nobel Prize-winning economist was referring to the UK's last currency crisis — a product of painful inflation, trade and fiscal deficits, and surging oil prices. The nation received a nearly $4 billion loan from the IMF, which required it to make deep cuts in public spending.

Krugman also derided the UK government's fiscal plan as "stupid and cruel," and accused Truss and her cabinet of "buying into supply-side nonsense", in a Twitter thread on Saturday.

Advocates of supply-side economics tout tax cuts, deregulation, and lower borrowing costs as the best tools to drive economic growth.

Mohamed El-Erian

In a Financial Times column, El-Erian underlined how unusual it is for a developed country like the UK to experience what's happened this week: chaos in its currency and bond markets, a loss of confidence in its leaders, an urgent central-bank intervention, calls for an emergency interest-rate increase, and a warning from the IMF.

Allianz's chief economic adviser warned the current tumult could result in higher borrowing costs and wealth losses for UK households. He said that would raise the risk of stagflation — when an economy faces stubborn inflation, stagnant growth, and rising unemployment.

El-Erian slammed the UK's planned tax cuts as "unsettlingly large, relatively regressive and unfunded" in the column published Wednesday.

Moreover, he underscored the incoherence of the country's policies in a tweet the same day. He noted that rate hikes and government-bond sales typically cool an economy, while tax cuts and bond purchases usually aim to stimulate it.

"There's an inherent contradiction in what they're trying to do," he told CNN on Wednesday. "That's why this is nothing more than a Band-Aid," he said about the BoE's bond-buying program.

Nouriel Roubini

"Truss and her cabinet are clueless," Roubini tweeted on Saturday about the government's fiscal plans. "Back to the 1970s. Stagflation and eventually the need to go and beg for an IMF bailout."

The economist, nicknamed "Dr. Doom" for his dire predictions, argued in a Wednesday tweet that the BoE should be raising rates to shore up the pound's value, instead of buying bonds and pumping money into the economy.

He also compared the UK to an emerging-market economy, given its incorrect mix of policies.

"BoE blinks and monetizes the reckless fiscal deficit at a time when monetary policy should become much tighter given the surge in inflation," Roubini tweeted after the central bank announced its bond-purchasing program.

"1970s stagflation ahead! Full lunacy of MP and FP," he added, referring to monetary and fiscal policy.

The 'disorderly' moves in the pound and loss of confidence in UK policy makers is historic, and point to the paradigm shift markets are headed towards, Mohamed El-Erian says

Jennifer Sor
Wed, September 28, 2022 

Photo by Rob Kim/Getty Images

The drop in the pound and the loss of confidence in policy makers is part of a larger paradigm shift, Mohamed El-Erian said.


The economist reiterated that the era of high-liquidity and low-interest rates was over.


But it could be painful for economies to dig themselves out of overly-iquid conditions, possibly resulting in stagflation.

The swift drop in the value of the pound against the dollar and the loss of confidence in UK policy makers is a historic moment – and points to a larger paradigm shift in global financial markets, Mohamed El-Erian said on Wednesday.

The top economist pointed to volatility spurred by the UK's new budget plan, which involves cutting taxes for the wealthy and slashing planned corporate tax hikes. It caused the pound to plunge to a 37-year-low on Friday, and to sink another 2% on Monday, with analysts projecting that the UK currency could sink below parity with the dollar next year.

The plan was criticized on Wednesday by the International Monetary Fund, which gave a stinging assessment of the new "mini-budget" for its focus on cutting taxes at a time of sky-high inflation. Unfunded tax cuts and increased debt will cause further harm, economists say, and the Bank of England could be forced to hike rates more aggressively than planned and increase the risk of a recession.

"It is amazing that this is a G7 country, that over the last six days, has experienced disorderly moves in the currency and in bond yields, a loss of confidence in policy making, now, direct, central bank intervention, and an IMF warning." El-Erian said on an interview with CNBC.

"That normally happens in a developing country. It does not happen in a G7 economy. So this is historic. It points to the paradigm shift we're going through and the fragility of markets," he added.

El-Erian has previously warned markets of the paradigm shift, pointing to central banks' pivot from quantitative easing to quantitative tightening as inflation continues to climb. That means that the era of high-liquidity and ultra-low interest rates is over – and exiting that regime could result in stagflation, hammering the global economy with of high inflation, high unemployment, and low growth.

"The longer you stay in this la-la-land of [quantitative easing], floored interest rates, dislocated markets, funny interventions, distorted asset allocations, the longer you stay in, the harder the exit. And what we're seeing [in the UK] is that the exit is really complicated," El-Erian said.

To combat the potential for higher inflation, the UK will have to hike interest rates to keep inflation under control. But that could also cause enormous financial pain to households, causing unemployment and floating mortgage rates to skyrocket.

It demonstrates the competing paths of the UK's fiscal and monetary policies, and it's critical that the US avoids a similar situation, El-Erian said. He has previously criticized the Fed for not acting on inflation sooner, but has recently urged the central bank to continue hiking rates to bring down runaway-inflation, despite the possibility of slowed growth and high unemployment.