Bank of England Turns

A sad day for the “Old Lady of Threadneedle Street”... and what it portends for the rest of us...

(Source: Getty Images)

Bill Bonner, reckoning today from Dublin, Ireland...

Oh my…

The Bank of England was for turning!

Liz Truss, Britain’s rookie Prime Minister, made a bold move. NBC News:

The U.K. is in turmoil as a gamble to solve its economic woes fuels a crisis instead

[Liz Truss’s] Conservative government's 45 billion pound ($48 billion) plan to slash taxes — particularly for the country’s highest earners — has sent shock waves through financial markets, causing the pound to plummet and leaving Truss' own political future in sudden doubt just three weeks after she took office.

And then, on Tuesday, what ho!… the market turmoil caused the BoE to ‘pivot.’ CNBC:

Bank of England delays bond sales, launches temporary purchase program after market turmoil

The Bank of England will suspend the planned start of its gilt selling next week and begin temporarily buying long-dated bonds in order to calm the market chaos unleashed by the new government's so-called "mini-budget."

Yes, dear reader, you can add “market chaos” to a long list of emergencies – epidemic, recession, politics, war, getting dumped by a girlfriend and mosquito bites – that will cause central bankers’ knees to buckle.

Inching Toward Normalcy

We never met a tax cut we didn’t like. And we don’t dislike Ms. Truss’s version. But just because we like it doesn’t mean it is a good idea. And for a country with double digit inflation… and $2.5 trillion of debt… a tax cut is unlikely to contribute much to national happiness.  

Tax cuts leave people with more money in their pockets. But to make any fiscal sense, tax cuts need to be matched by spending cuts. That was the problem at the heart of Donald Trump’s 2017 tax plan too. The additional cash in private hands feeds inflation and starves public finances, leaving the government to borrow and/or print more.  

Eventually, every penny squandered by the feds must come from individual households (corporate taxes may be levied on businesses, but the ultimate payers are human beings). Without spending cuts, reducing taxes just shifts the cost into the future – in the form of higher prices.

UK investors saw where this was headed immediately. If inflation is going higher, they reasoned, interest rates need to go higher too. And before a Royal Guard could blink an eye, the yield on a 30-year gilt (a government bond) had jumped from under 1% in December to 5% on Tuesday.  

The inflation rate in the UK is officially 10.1%. Lending money to the government at a 5% yield for 30 years… is either very generous… or wantonly stupid. But at least 5% was a modest step towards normalcy.

And what do you call it when, after a long period of bizarre and claptrap monetary policy, you suddenly move closer to normalcy?

An Emergency!  

This Ol’ Gal

It was a sad day for the “Old Lady of Threadneedle Street,” as the bank is known. She was set up in 1694 to help England raise the money – $1,200,000 – to build its navy. At the time, the government’s credit was poor. So, the bank offered lenders 8% interest – in gold – to bring in the cash.

But, over the years, the ‘Old Lady” seems to have gone a little ga-ga. She got knocked off of the gold standard in WWI and never quite recovered. Then, in the 1930s, she gave up on gold altogether. And finally, the UK sold off  its gold reserves in the famous ‘Brown Bottom’ in which the Chancellor of the Exchequer, later Prime Minister, Gordon Brown, managed to dispose of Britain’s gold at the very worst prices in 20 years.

And now this…

Her mind gone, at least the ol’ gal is still on her feet… and can still do a marvelous pirouette. The BoE now says it was temporarily departing from its tightening program – we hardly knew ye! – in order to counter what it said was market “dysfunction.”

But where was the dysfunction? In the marketplace, which was merely adjusting to the threat of normalcy? Or in the Bank of England itself?

Why was a 5% yield on a 30-year government bond cause for panic? It still leaves the yield on gilts 510 basis points below the rate of consumer price inflation.  Investors who lend money to the government are agreeing – if everything stays the same – to lose more than half their money. Nothing ‘normal’ about that!

The BoE has made its pivot much too soon…and now they will make their economy even more dysfunctional than the US. But here at Bonner Private Research, we are grateful to drug addicts, dumbbell central bankers and bitter ex-spouses. The world needs jackasses… to show it where not to go and what not to do. In that regard we give thanks to the hinds at the Bank of England…

…and hope the Fed gets the message..

Regards,

Bill Bonner

Joel’s Note: It's official. The US economy shrank by 0.6% in the second quarter, the Bureau of Economic Analysis confirmed on Thursday. That follows a first quarter decline of 1.6%. Traditionally, a recession is defined as two consecutive quarters of falling GDP.

But what about the second half of this year? And beyond…?

Earlier this week, billionaire investor Stanley Druckenmiller said the stock market could be flat for the next ten years and that the US would enter yet another recession in 2023.

Meanwhile, Monday’s Case-Shiller Home Price Index shows the pillar of middle class American wealth, the housing market, has begun to wobble. July prices registered their steepest month-over-month decline in the index’s history as rising rates push affordability beyond the means of many.

Then there’s 40yr high inflation… an energy crunch in Europe and the coming “Winter Catastrophe”… and increasing geopolitical instability the world over.

But we’d like to hear what you think. Take our poll below and let us know what you fear most about 2023.