The Economy

Their projections are complete idiocy. Even if they were honest (and they are not even projecting a recession), they have no ability to make accurate projections based on their actions. Particularly because all of the money they have created out of thin air and unleashed willy nilly into the economy that has created massive distortions to capital markets.

Put aside the asset buying under Bernanke that was never undone. They created more money out of thin air in the last 4 1/2 years (starting with the short-term lending markets imploding when they were trying to raise rates prior to the pandemic, and then with all of the asset buying they did during the pandemic when they predictably reversed) than had been created in the prior 350 years! When that gets undone, it is going to be miserable.

They have no fucking clue what happens next. You do not unleash a wave of liquidity like that (creating massive asset bubbles. ... and ultimately consumer price inflation, too), and create trillions of dollars of epic malinvestment (like what happened with leveraged loans that rely on being able to continually roll over debt at no interest), and get out of the the mess you have created without a historic credit crisis and historic economic pain.

I'm still betting that they ultimately choose runaway inflation over the price for what they have done. They might not really have a choice, though, because the very little they are even doing might prove to be enough to break something. I'm even a little surprised the 10 year has gotten to 3.5 percent without an event. But they still haven't really touched the balance sheet yet.

 

I have no idea how they get unemployment up, or just how much it will happen before they panic. But I'm convinced that the tight labor market is maybe the biggest factor in the consumer price inflation, so unless the economy tanks, inflation is going to become sticky and permanent. With the labor market this tight, workers have leverage and with that leverage they are driving up wages. And those wages are contributing to a massive wage-price spiral that is fueling the rise in consumer prices more than any other factor.

 

It's not a simplistic narrative. There are a lot of moving parts. But the dollar is surging relative to a lot of other currencies, not just cable. Incoherrent fiscal policy isn't doing the UK any favors, but 95 percent of this is due to the Federal Reserve hiking their overnight rate fairly aggressively compared to everyone else (even though other central banks are just starting to jump on board too). They also are just starting to let assets roll off the massive balance sheet they built up by buying trillions of dollars worth of bonds in a reckless experiment, and it is hitting the rest of the world.

It is ostensibly to try to fight inflation, but the problem is that we are not just dealing with inflation, globally it is a stagflationary environment. Thet means they have been hiking into slowing economic growth, which is not the way their keynsian blundering is supposed to work if you buy into their rhetoric. But the zero interest rate policy, or ZIRP, for a decade and a half, combined with trillions of dollars of asset purchases, recklessly created a "no good options" situation.

The effect has been to send capital flowing into the U.S, which has pushed up the value of the dollar. That effect is being exacerbated by the sense that we are heading into a global recession and the knee-jerk reaction always being to see the U.S. as relatively safe.

If it continues, something will break, because the ZIRP sent debt levels through the roof and there have been very few lending standards in the serach for a little bit of yield. The UK or Europe (the Euro is trading below parity) are likely heading into a nasty recession and things will be tough, but the real credit crises that are the first dominoes to fall may not come from there. ... it's the emerging market countries that have borrowed heavily way too cheaply that are getting hit the hardest by the stronger dollar. And outside of sovereign debt, if this continues (the if part of what I am saying. ... because they have managed to prop this up for a decade and a half and make it into a bigger mess so who knows if they will just outright hijack the debt markets and try to price fix directly), the corporate leveraged loan market is a ticking time bomb. There has been trilions of dollars of debt that has been leveraged up. ... for public companies to buy back their own stock and private equity to buy and flip companies (leaving the companies with the debt). ... and all of that debt relies on being able to roll over the debt forever at little to no interest. With rates nominally higher, that isn't possible. The sad part is that in real terms, those rates are still negative (they have raised rates, but bond yields are still well below the inflation rate), so they aren't even effectively dealing with the inflation while pricking the debt bubble they have blown.

Welcome to reality, people, as this happens.

 

FYI. ... Bank of England preparing emergency intervention after pound slumps to all-time low - live updates

Question is if they will try to jawbone things for the time being or whether they will raise rates even though there isn't a meeting.