One week on from the shock announcement of the UK’s mini-budget, the pound sterling has recovered to the levels it was at before the panic. The UK, however, is far from out of the woods. Sterling may have rebounded, but the gilt market - the UK Treasury market - is on life support from the Bank of England. With interest rates surging, mortgage lending is drying up. The UK economy is heading towards a recession. And it is not just the UK that is under stress. On the other side of the Atlantic too, tremors are running through the US Treasury market, the foundation of the dollar system.
I suspect that, whatever the ideological cover employed, we are simply reaching the "open looting" stage of the UK's slide towards developing country status.
Thanks. Very clear. We are in the grip of runaway loops, yes? We have a real economy that needs constant promises of growth and now a financial economy that needs constant injections of new money.
You say 'global markets react in *non-mechanical* ways'. Yes, they are complex systems with reinforcing loops - e.g. lower gilts drive higher margin calls drive more gilt sales etc. - that can enter into runaway to dysregulate the whole system.
Rather than predicting UK's slide to developing country status, could we not peg it as an "un-developing country"? It's a very gradual unwinding From an 18th Century pinnacle. To call it developing is both too kind and too unkind.
"This raises once again the nagging question of what the key people in central banks and financial regulators - not just in the UK but around the world - choose not to know about the inner-workings of vital financial markets."
A real dilemma -- I suspect central bankers are the types of people who find Chartbook informative.
Wait the complaint here is that the BoE had to intervene after the government made an unprecedented financial gaff in a time of unprecedented inflation? Isn't that perfectly normal? What's the point of having an institution like the BoE if you want a system where it never has to intervene, anyway?
How do you have a pension system that's not profit driven? Should the pension funds be trying to shrink?
Financial history in real time. A prime minister who neither understands nor respects finance, scary!
Brillant, thanks vor the enlightening analysis.
In very risky times, even Federal Bonds sold on the open market do not stabilize and need central bank support. Why not have the pension fund bond portfolios be primarily a diverse group of private quality bonds with a bit better return. Have the federal bonds purchased directly by the central bank, to properly finance government deficits - that is rather than the private sector monetize a considerable amount of government finance, let the central bank do it completely. The federal government could then do its job and properly meet the needs of the people and the environment. The resulting full employment economy would require little funding anyway. So the pension funds would not have government bonds no matter their preference.
You anticipated my question in your #4. I suppose depending on the answer, if one could ever be had, that we might be facing a moral hazard quandary where bad behavior has fewer consequences because of government intervention that has the effect of spread losses into the otherwise innocent.
I hope your flight remains safely (meaning very high) above Azerbaijan and whatever other hotspots you might be jetting over. It’s not the safest part of the planet at the moment.
Stocks are price-volatile but stable income. Bonds are price-volatile but stable income. It is stupid to focus on stock prices while ignoring bond prices.