Last week, the Bank associated with England suddenly pivoted. It gave up its inflation combat to rescue its monthly pension funds and bond marketplace. What exactly happened? And what does it tell us about the Federal Reserve’s inflation fight? Peter Schiff explained it all on his podcast.
It has an old expression — “ No one rings a bell” — meaning there’s no caution when there is a major top or even bottom in the markets. But Peter said there often is a bell but nobody hears it. Last week, Peter said we got the particular “ mother of all bells. ”
“ It was literally Huge Ben that rang because the bell was in England. … The Bank of England was your first major central bank to blink in this worldwide game of chicken. ”
Last week, the Bank associated with England pivoted and came back to quantitative easing .
Philip called this development “ very significant. ” Since up until the announcement, Bank of England Governor Andrew Bailey was just as hawkish as Jerome Powell. The lender of England raised interest rates from 0. 1% last December to roughly second . 25%, including a 50 basis point rate hike in August. It was the largest BoE rate hike within 27 years.
“ He had been talking tough about how resolute the Bank of England has been to fighting inflation. They have perhaps the highest inflation in Europe. It’s way above their own 2% target. It’s a double-digit number. It’s above 10%. ”
Bailey even said this individual was committed to bringing down pumpiing no matter the cost and mentioned he was willing to withstand some pain, just like Jerome Powell .
“ Well, that was all a bluff because we obtained some pain overnight and Bailey folded like a cheap suit. And instead of quantitative tightening, they’re back to quantitative easing. The rate hikes are probably permanently on hold because the Bank of England declined to allow a potential crisis to unfold as a result of rising rates of interest. ”
The crisis manifested alone in the UK pension system along with plunging bond prices. CNBC summed up the problem .
“ In order to top up the collateral on these bonds, some funds needed to raise cash. But because of the speed of this crisis, many funds were caught out and were forced to liquidate their next most investment funds available, long-term bonds or gilts, causing prices of bonds to fall even more. ”
To be able to stabilize bond prices, the BoE stepped in to buy long-term bonds, creating artificial demand and propping upward prices.
This particular pension problem isn’t distinctive to the United Kingdom. Pensions systems worldwide face the same issue, including in the United States.
When interest rates fall to zero, bond holdings in pension funds don’t generate as much interest income. Pensions need this income to pay benefits. So , in order to boost their incomes, pension funds borrow money at low interest to buy new long-term bonds using existing bonds because collateral. They make up for lower yields by holding a lot more bonds.
Nevertheless interest rates rise, the value of their bond portfolio collapses even as the interest on their debt rises.
“ All of the pension funds that will had borrowed short to purchase long-term bonds were obtaining crushed because the value of the bonds they owned was collapsing and the cost of servicing the debt was soaring, plus they were in a position where they were going to get margin calls. Those margin calls had been going to force an already collapsing bond market to fall even more and that might have wreaked havoc throughout the Uk. ”
In simple terms, instead of raising monthly pension contributions or cutting pension benefits to deal with their shortfalls, pension managers took the simple, but reckless way out plus borrowed money.
On top of that, the newly elected British prime minister rewarded voters with a big taxes cut that threw a lot more gasoline on the inflationary fireplace.
Great Britain had been looking at a potential crash within the bond market and the Bank of England rode into save the day.
“ The Bank of England folded. They pivoted. They decided to launch a new QE program. Remember, recently, they were committed to quantitative tightening. Now they said they will purchase whatever it takes. They have committed to an additional QE infinity in order to support the bond market. These people now have to print Uk pounds to buy these gilts. So , instead of fighting pumpiing, which yesterday was general public enemy number one – this had to be brought down at any cost – now, all of a sudden, possibly the cost, well, forget about that will. We’re now going to develop inflation. ”
The central lenders in England claim this is not a monetary policy decision. It was a move to avert a crisis. But as Peter said, it is most definitely a financial policy decision.
“ That’s the just policy they make — monetary policy. Deciding to start QE is monetary policy. I don’t care what you would like to pretend. That’s what it is. ”
The BoE also mentioned it just wants to keep an orderly market.
“ Well, you can’t fight inflation and maintain an orderly market since the markets have been propped up by inflation. So , when you are going to fight inflation, you’d better be prepared for a disorderly market. And until the other day, the Bank of England has been bluffing that they were. Great that their bluff continues to be called, they had to show their own cards, and they’re holding absolutely nothing. And so, inflation won. ”
You may think this has nothing to do with you if you’re reading this in the US. The problem is, the Government Reserve is also bluffing . It’s only a matter of time before their bluff will get called.
“ Is the Federal Reserve, when confronted with the same situation, will they make a different selection than the Bank of Britain? Does the Federal Reserve have more integrity? Are them willing to allow a financial problems? Because the same thing is going to happen here. We’ve got all sorts of power in our markets. We’ve got a bigger debt bubble than the British. It’s just that the day associated with reckoning for us is not going to come as early as it did to them because the dollar is going up. ”
When that day associated with reckoning does come, Philip said he expects Jerome Powell to make the same choice as Andrew Bailey.
“ We don’t care how much he wants to bark about getting tough on inflation. At the end of the day, he will not bite. The Fed is a paper gambling and it will fold just as rapidly as the Bank of England when they’re confronted with a real crisis. ”