The pace of interest rate rises by the central banks is shocking. This is troubling because it hurts people. But the news gets worse.
Things have gotten so bad that the central banks will give in and instead of tightening the balance sheets, they are starting dumping money into the economy all over again. The one who has been reading the blog on a regular basis know we saw this coming. The situation, for example in the UK has become so bad that the Bank of England is already starting so and are buying government bonds (Gilts) to support the bond market and the British Pound. It’s a 180-degree turnaround. It is scary but not at all surprising.
Central banks run out of ideas and have no clue what to do. On the one hand, prices are soaring, and people can’t afford their cost of living. On the other hand, inflation-fighting measures are leading into a worldwide recession. You can’t kill inflation and get growth at the same time. The measures planned to fight inflation by increasing interest rates at a record pace but at the same time flooding the economy with money is simply a disaster. What good is $100 a month of tax cuts, 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 cancelling each other out. It just cost more money and solves nothing.
Governments are raising rates to slow inflation while counting votes and buying more with dishing out free money. We can’t have things both ways. Cutting inflation causes pain. Cutting it quickly causes more pain. Few governments have the guts to do what is necessary right now.
It’s big trouble if they don’t get it right. Nobody should be shocked by what will come.