The world is so awash with debt that even quite small increases in rates could have some potentially devastating effects
This article by Jeremy Warner for the Telegraph on the 25th September is of considerable importance as he highlights the dangers to the economy with these words:
We enter the season of mists and mellow fruitfulness with things looking more precarious than they have in a long time, at least on the economic front.
This might seem an odd thing to say given the bizarre times we have just been through. What is more precarious than an economy shut down by Covid? Famous last words, but as things stand there is very little chance of returning to the lockdowns of the past year and a half, so we can reasonably assume those times are over.
The problem, rather, is that the relative stability of the pre-Covid world shows very little sign of re-establishing itself. Instead, there is a feeling of rudderless drift and of a Government that is very plainly not in control of events. Not since the immediate aftermath of the vote for Brexit, and before that the financial crisis, have things seemed quite so unsettled.
One crisis builds on another, each one taking a weak, if still apparently popular, Government by surprise, only to be answered – because this is a Prime Minister who does not like facing up to hard choices – with another wadge of taxpayers’ money that the Treasury doesn’t have.
Ministers appear constantly on the back foot, the current energy crisis being only the latest example of it. Staff and product shortages abound, in a way we have not seen for decades; the costs of many goods and services – if you can get them – are seemingly going through the roof. With the now very real prospect of petrol rationing, it sometimes feels as if we have been put in a time machine and spirited back to pre-1989 Eastern Europe. I exaggerate only a little.
He later ends with these words of warning:
In a letter to the Chancellor last week, Andrew Bailey, the Governor of the Bank of England, admitted that CPI inflation is likely to rise further in the near term, “to slightly above 4pc in 2021 quarter four”, and then remain there for much of the first half of next year.
However, he reiterated the Bank’s view that elevated global cost pressures will prove transitory. Ergo, no need to do anything for the time being.
The Bank is obviously partially right about these transitory pressures, with big bottlenecks in supply as economies splutter back to life after the coma of lockdown.
But it is hard to find anyone outside the Bank of England or the Treasury who believes this is the entire story.
The assumption that today’s spike in inflation is just a temporary bump in an otherwise tame inflationary outlook doesn’t sound right given what’s beginning to happen to wages and inflationary expectations. It’s virtually guaranteed that high single-digit pay rises will become the order of the day as workers seek to compensate for today’s hefty increases in the cost of living.
Sooner than they anticipate, central banks are going to be forced into action. We’ve grown used to record low interest rates. Many of those in work today cannot even remember the higher interest rate environment that ruled before the financial crisis.
The Bank of England has elected to keep the base rate at 0.1pc
Those days are admittedly unlikely to return in any foreseeable future, but the world is now so awash with debt that even quite small increases in rates could have some potentially devastating effects.
As for overly inflated stock markets, just wait for central banks to be pushed into action. That moment of truth looms closer into view.
For the full article in pdf, please click here:
Andrew Bailey, Governor of the Bank of England