Great Disinflation 2023 - The real cost of borrowing will snap higher

Overtightening by central banks still clinging to a broken Lakatosian model (DSGE) has already ensured that the bust in early 2023 will be deeper than necessary, and deeper than market opinion or futures contracts suggest.

Yields on 10-year US Treasuries and UK gilts will be below 2pc again by June. 

Global bourses will suffer as corporate earnings buckle and more icebergs float our way from the shadow banking nexus, now the prime source of lending thanks to the unintended consequences of regulators (do they never learn?). 

The financial gendarmes hobbled the banks, which pushed the QE leverage bubble off books and into opaque instruments, where it is equally dangerous.

Dollar all-time high in October, henceforth in a secular downward slide that will accelerate once the Fed does a screeching U-turn and starts to slash rates. 

This will alleviate the painful squeeze in the $14 trillion market for off-shore dollar debt, the prime lubricant of global commerce and investment.

M3 contracted at an annual rate of 4.9pc over the three months to November in nominal terms, according to the Institute of International Monetary Research. It is almost down to zero year-on-year, something that never came close to happening in the 1970s.

The Fed is not looking at this flashing red signal. It has tied its credibility - and the fortunes of the US economy - to two sets of lagging indicators: jobs and core inflation.

Real M1 money in the eurozone is contracting hard. But Buba wants to scorch the earth and sough salt in the ground for Catharginian certainty.

The Bundesbank demanding instead that Italy Giorgia Meloni ratify the EU bailout fund (ESM), which she refuses to do because the instrument entails enforced austerity if ever used – and a Cypriot-style seizure of bank deposits? – under colonial commissars from Brussels. 

This will be the political fight of 2023.

Ambrose Evans-Pritchard Telegraph 3 January 2023

Higher interest rates are here to stay

The big debate in economics right now is whether what we are seeing today in relatively high inflation and surging interest rates is just a temporary phenomenon, caused largely by the supply chain disruptions of the pandemic and sanctions against Putin, or something more permanent.

Unlike my colleague, Ambrose Evans-Pritchard, I fall into the latter camp.

I suspect that getting it back to target is going to prove harder than generally believed, and as a consequence I don't see interest rates falling by the end of the year.

Jeremy Warner  Telegraph 3 January 2023

Banks Need to Worry About Shadow Banks


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