Winter, early 2023. Europe is in the second month of an energy crisis. An Italian, a German, a Frenchman and an Englishman walk into one of the few hotels still open. For economy, they decide to share a room. The manager says ‘je suis desolee, we ‘ave no ‘ot water’. The German says, ‘never mind, I’ll have a cold shower – zehr Verspannung!’ The Frenchman says, ‘tant pis, I weel ‘ave pas de douche’. The Englishman says ‘this is not good enough – keep your room, I will sleep out in the cold’. The Italian says ‘what is a shower’?
Ok, ok, I know, right…Sorry. It’s a new play on an old communist-era joke, inspired by one of the best fintwit accounts out there. But that’s the new world order – shiver, own nothing and be happy, plebs. That’s the future engineered by our incompetent, currency-debasing leaders.
Debasing no more? Central banks are now in full tightening mode. The Bank of England yesterday got off its seat and joined the party fully with a 50bps hike just as it predicted a recession and 13% inflation. Wonder why CBs are hiking into this kind of mess? Because they are pro-cyclical, cutting in expansionary times and hiking into contractions. Why? You tell me – the only assessment I can give is that they have systematically failed to deliver the right policies at the right time. Policy failure, from energy to economic, is everywhere.
Just how could they get it so wrong?
People like me were warning two years ago about inflation expectations becoming unanchored due to the fiscal and monetary stimulus meeting severe dislocations in global supply chains, labour markets and investment. But they were self-appointed Masters of the Universe. Here’s the Bank of England from November last year:
“The ability to loosen monetary policy in response to any significant negative demand shock in the future was to some degree constrained by the effective lower bound of Bank Rate, whereas interest rates could be increased by as much as was needed to bring inflation back to target sustainably should any second-round effects materialise.”
Oh really? As much as needed?
Anyway, what has been clear is that the BoE has been worried that raising rates will harm the economy as it slows downs due, chiefly, to imported inflation. This is not an easy position to be in for sure, but the inaction and errors were made last year, when the economy could easily have handled tighter policy.
As I said last September, almost a full year ago: “For now the CBs are still waiting it out and getting further behind the curve. A bitter pill today has been avoided, but the medicine required will be harder to swallow when it finally comes. Rates are going to need to rise to tame inflation.”
The MPC was looking at 4% inflation last year and did nothing. Now they are looking at 13% inflation and cannot do much about it. Energy prices will have to come down markedly and that is not something the MPC can do much about now. Masters of the Universe no more.
