UK Throwing in the towel and accepting inflation is not a good option, but it may be a better one
Britain’s sudden descent into crisis has already devoured the credibility of several of the most important institutions in national life, including the prime minister, the Treasury, the Bank of England, the Conservative Party, and the nation’s asset management industry.
Once lost, credibility is hard to restore
Central banks were holding interest rates low to try to prod people into risk-taking. Much of that risk and leverage was concealed in opaque derivative structures.
Just as in the Global Financial Crisis of 2007-08, the scale of that “shadow banking” system is only being revealed once bond yields surge upward.
It’s very hard to see how Kwarteng could stay in his post, and he would be best advised to resign. The arguments against expelling Truss are more practical.
Conservative Party rules don’t currently permit a leadership contest until September next year. In any case, the sheer embarrassment of a fourth Conservative prime minister in six years would make the party look ridiculous and prolong the uncertainty for markets.
Patience with austerity has run out. That leaves inflation as the option that might win out.
If the BOE relents, or even pivots, lower rates and a cheaper pound would drive inflation that would deflate away the piles of debt.
Debt deflation is horrible, and the UK already had a taste of it under the Conservative chancellor George Osborne from 2010 to 2016. Throwing in the towel and accepting inflation is not a good option, but it may be a better one.
John Authers Bloomberg 14 oktober 2022
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