I admit that I keep saying that inflation will go away in the UK, but it is always subject to the caveat “assuming there is no further external shock to the UK economy”. But suppose there was?
The risk of such a shock is developing now. As the FT notes:
US Treasury secretary Janet Yellen has warned of a “constitutional crisis” that risks economic and financial catastrophe if Congress does not raise the federal debt limit, with the government in danger of running out of cash in the absence of new borrowing capacity.
Right now it is thought that the Congress approved US debt limit will be hit by 1 June and the Republicans in Congress are refusing to raise it, putting at threat many of President Biden's programmes as a result, as well as leaving open the possibility of a major US government shut down.
We have , of course, been here before. This is a common tactic, usually of the Republicans. They rather oddly let their own Presidents raise the debt limit by however much they want, and Trump did so with wilful abandon. But this time it seems like they are not in the mood to negotiate, and that the conditions they will attach to the demands that they are making are too extreme for the President to accept.
One possible outcome is a US government close down.
Another is a debt default by the US, which would result in financial market turmoil and significant increases in interest rates.
There is also a possible let out. The fourth section of the 14th Amendment to the US constitution, passed in 1866, says:
The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.
The trouble is those words ‘authorised by law'. No one is quote sure what they mean. And as a result no one knows if Biden can ignore Congress and keep issuing debt. Hence Janet Yellen's warning.
This issue needs to be watched. It could be the next big crisis. It need not happen. No one, barring right wing fanatics who hate government., will win from it. The cost to countries with debt denominated in dollars (which is much of the global south) will be economically crippling. But it may just happen.
If it does there will be ramifications here in the UK. Andrew Bailey at the Bank of England might be able to use this as the excuse to push through interest rate increases on a scale he had never imagined. I do not doubt he would, if he could. And then the madness of the US Republicans will become the living nightmare of UK households.
Would the Republicans care? I really don't think so.
The economics of the madhouse may get its day soon. We all need to worry about that.
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The view among investors/traders is “we have been here before on a fairly regular basis – they will sort it out”.
This is probably true…. except that the problem with brinksmanship is that there is always the possibility of miscalculation.
I think the mood in the GOP has changed
Possibly… but they all have “skin in the game” – ie. lots of money in the markets…. and backers that have money invested in the markets.
Will turkeys vote for Christmas (or should I say Thanksgiving)?? Unlikely…. unless, as I say, there is a miscalculation.
This looks and smells like complacency; again. Meanwhile in the real world the bankers do not recognise Warren Buffet takes the view some ‘punishment’ is required for the continuing debacle in Amercian commercial banking. He sees that there are no real penalties for failure. Buffet’s righthand man, Charles Munger put it bluntly and trenchantly: “I don’t think having a bunch of bankers, all of whom are trying to get rich, leads to good things. I think bankers should be more like an engineer, avoiding trouble rather than trying to get rich … It’s a contradiction in values.”
Even the investment world can see the whole set-up is rotten. Mutatis mutandis here.
Wholeheartedly agreed.
The problem is that the Democrats all too often by the nature now of political funding in the U.S. get dragged along by the Republicans and really, they need to draw a line in the sand now and address this once and for all.
One way to do this is for Democrat grandees to stop interfering in the selection process for candidates for Washington erring on the side of more moderates. They need more candidates like Alexandra Cortez Ocasio for a start and stop impeding Bernie Sanders.
Following the money again, the only motive I see is the ultimate privatisation of public services. Some people would make a lot of money. But is there enough people with the wherewithal to orchestrate it?
An interesting post on Twitter pondered whether the Tories had not intention of winning the next election, but instead to install as many as possible on the boards of as many companies as possible.
Richard,
The Republicans are demanding huge cuts in services ( eg Medicare) as their price for agreeing the deficit.
The usual vested interests are continuing with the cry the only way to curb inflation is higher interest rates and a recession to cure the masses of their unreasonable expectations.