Well, last week’s meetings of the IMF and World Bank weren’t exactly the equivalent of an Inaugural Ball.
In fact, there apparently wasn’t much festiveness at all. Instead, Neil Irwin and Courtenay Brown report, there was – and is – “a deep sense of foreboding among the world's financial elite.”
One Near East financial official said at a Group of 30 event on Saturday, we have entered "an era of enduring uncertainty and fragility."
Irwin and Brown warn that leaders around the globe “face a situation in which the policy toolkit of the 2010s is no longer readily available.
“Fiscal and monetary policy is constrained by the pandemic, war and climate change.”
On the one hand, things in the nation’s capital appeared on the surface similar to how they looked before the pandemic was unleashed:
Limos lining up at luxury hotels and crowded gates at Dulles International Airport for the Saturday night Lufthansa flights to Frankfurt; too big to fail banks throwing top-shelf receptions attended by badge-wearing people in dark suits. You get the picture.
But the challenges that now lie beneath that growingly unstable surface have changed in a profound way since then.
The Federal Reserve and their international peers are aggressively – some say obsessively – raising interest rates to try to bring down inflation, after a decade that saw central banks trying novel and, in many instances, untested, methods to goad prices higher.
Boy, did that ever work!
By Dave Allen for Discount Gold & Silver
Well, last week’s meetings of the IMF and World Bank weren’t exactly the equivalent of an Inaugural Ball.
In fact, there apparently wasn’t much festiveness at all. Instead, Neil Irwin and Courtenay Brown report, there was – and is – “a deep sense of foreboding among the world's financial elite.”
One Near East financial official said at a Group of 30 event on Saturday, we have entered "an era of enduring uncertainty and fragility."
Irwin and Brown warn that leaders around the globe “face a situation in which the policy toolkit of the 2010s is no longer readily available.
“Fiscal and monetary policy is constrained by the pandemic, war and climate change.”
On the one hand, things in the nation’s capital appeared on the surface similar to how they looked before the pandemic was unleashed:
Limos lining up at luxury hotels and crowded gates at Dulles International Airport for the Saturday night Lufthansa flights to Frankfurt; too big to fail banks throwing top-shelf receptions attended by badge-wearing people in dark suits. You get the picture.
But the challenges that now lie beneath that growingly unstable surface have changed in a profound way since then.
The Federal Reserve and their international peers are aggressively – some say obsessively – raising interest rates to try to bring down inflation, after a decade that saw central banks trying novel and, in many instances, untested, methods to goad prices higher.
Boy, did that ever work!
Bond Markets See Rates Going a Lot Higher
As a result, B&I note that global bond markets are pricing in substantially higher rates, “leaving governments and other borrowers less room to maneuver.”
The U.S. dollar has soared in value this year, putting dangerous stress on the entire world financial system. Just ask the holders of any foreign currency how their fiat is doing against the dollar these days.
IMF managing director Kristalina Georgieva told a Group of 30 elites, "It is very telling that the tougher the environment becomes, the easier it is for people to remember my last name and pronounce it correctly."
The 2008 financial crisis, and the s-l-o-w-w-w recovery that came after, were certainly memorable for the pain they caused tens of millions of households.
But economic tools were reasonably well-suited to addressing that pain. As B&I point out, “it was fine to spend money and cut rates when inflation was low and demand for government bonds seemingly bottomless.”
The fundamental challenge confronting policymakers today is that these problems can’t necessarily be solved by a Wizard of Oz turning financial and economic dials behind Curtain Number 3.
Instead, we’re facing numerous limitations like fewer workers (lotsa them), significant supply chain disruptions and, yes, another major war.
Combined, they acting to force central bankers into a sense of compelled sadism to bring down demand and, thus, inflation.
Trussonomics, We Hardly Knew Ye
To a large degree, the recent events in the UK seemed like a warning sign of what's to come in other rich countries (no wonder Janet Yellen is reportedly leaving the Biden administration soon).
Bond markets essentially forced the Brit government to back off its desired tax-cutting plans, lest deficits grow and borrowing costs escalate further.
"The problem,” according to Bank of England governor Andrew Bailey, “is that the supply side has shrunk, particularly the labor force, and the economy has been hit by a huge shock to national real income from the war."
So, at the moment, the world's economic challenges are constrained by factors that finance ministers and central bankers can't control.
After all the drama and upheaval in financial markets, almost none of the tax cut plans proposed under rookie UK Prime Minister Liz Truss will see the light of day.
Newly installed finance minister Jeremy Hunt today said that just two pieces of the original plan would remain. And as Churchill would no doubt quip, the rest is history!
Notably, he (Hunt, not Churchill) added, a proposal to help households and businesses deal with soaring energy bills will also be scaled back, costing taxpayers "significantly less than planned."
B&I note that the U.K.'s flipflop “caps an extraordinary saga in which financial markets all but forced officials to scale back spending plans — a dynamic not seen in a developing nation in decades.”
They believe it may also be a cautionary tale for other countries – Italy is a prime example – who may be more circumspect about their own spending proposals in the coming months.
Despite, the rollback of Truss’ proposals, market damage lingers. Even with the U-turn, the country still has higher borrowing costs than before.
Yields on U.K. bonds did fall after Hunt's announcement, but they remain a lot higher than before the chaotic events unfolded.
Today, the yield on the 30-year gilt (the equivalent of a U.S. Treasury) fell over 40 basis points to close at 4.34%. About three weeks ago, on the eve of Truss’ first tax cut announcement, that same bond yielded 56 basis points less, at 3.78%.
Government bond yields have risen across much of the world, thanks largely to central bank action.
And fears of financial stagnation – even calamity – are rising. Is there any way out of this mess without throwing the U.S. and global economy into a deep recession?
Time will tell, for sure, but in Friday’s What a Rush…of Gold & Silver blog, we’ll dive into how some believe we might be able to move the needle on inflation without bringing on a bloody result.