From Bad to Worse: The Bank of England Reveals What’s Next

Andy Snyder|September 29, 2022

The markets are shocked.

The pace of interest rate rises is dropping jaws all around the planet.

It ties into what we talked about yesterday morning. Rates lead the market.

It’s not good news right now.

“It’s shocking just the speed at which this has happened,” a particularly inflation-worried global bond manager told The Wall Street Journal this week.

“I think the major problem is payment shock,” a mortgage broker told CNBC. “When I sit down with clients and the rate is in the 6s, their payment is outrageous sometimes.”

It’s troubling.

But the news gets worse.

Things have gotten so bad in the U.K. that it’s done what so many have predicted will ultimately happen here in the States.

Instead of tightening its balance sheet next week… the Bank of England is once again dumping money into the economy.

It’s a 180-degree turnaround.

After the nation’s bond market went haywire, its central bank said it would intervene “on whatever scale necessary.”

It’s scary… but not at all surprising.

It turns out the U.K. is like much of the world. It’s in quite a pickle.

On the one hand, prices are soaring. Folks can’t afford to eat, heat their homes or drive to work.

On the other hand, inflation-fighting measures are slowing an already anemic economy.

It’s as if a comatose patient spent the last decade with a bag of adrenaline hanging from his arm. Parts of the body got quite used to the shot of free energy… but the heart is threatening to blow.

Pulling the IV will calm the heart. But the other organs will fail.

The British government’s answer is to stimulate in a way it thinks will cut inflation. It’s putting limits on energy prices, cutting taxes, eliminating caps on bonuses and slashing property taxes.

It’s pulling the adrenaline from the patient’s arm… and sticking it in his neck.

It’s crazy talk.

Disaster’s Coming

The consensus among the crowd paid to deal with such things is the plan is a huge disaster.

“I can’t see how you can kill inflation and get growth at the same time…” said the chairman of one of the nation’s largest grocery chains.

Nobody but elected officials can.

Michael O’Leary didn’t hold back: “The Truss government has poured petrol on a bonfire with a budget that does not really make a lot of sense,” he said, “and is likely to drive inflation higher.”

But here’s the best synopsis yet…

“What good is 100 euros a month of [tax] cuts,” asked Helena Morrissey, a leading banker, “if your mortgage payment goes up twice that amount? We need policy levers to be pulling in the same direction, not fighting each other and canceling each other out.”

Ah… that’s the rub of it all.

One arm of the government is raising rates to slow inflation… while the other is counting votes and buying more of them with free money.

It’s exactly the trap we’re in here at home.

The Inflation Reduction Act pours hundreds of billions of dollars into a green energy industry that doesn’t need the cash. We’re dishing out just as much money for student loan forgiveness. And most recently, the White House announced it is looking to make it easier for college kids to access food stamps.

It’s not just Biden. Every administration since George W. Bush has done it.

It’s created an addicted patient.

On the health front, for instance, we’re being told the pandemic is over. We don’t even have to mask up at a doc’s office these days.

But on the fiscal front… we’re still in emergency mode – red lights and all.

It turns out that we can’t just stop handing out gobs of free money and expect folks to say, “Hey, thanks for the help.” Even though pandemic relief was a temporary move in response to a shutdown that ended two years ago, cutting off a lifeline often means that many people will fall.

Our point this morning is quite simple.

Watch the U.K. very closely.

What happens there will happen here.

We can’t have things both ways. Cutting inflation causes pain. Cutting it quickly causes immense pain.

Few governments have the stomach (or the votes) for such things.

It’s big trouble if they don’t get it right.

Nobody should be shocked by what’s to come.