The Bank of England will likely institute an emergency rate hike of 25-50 BPS today in our opinion as the Pound plummets against the USD (FX Headwinds Will Persist Into 2023).
- What is fascinating is that the fiscal side loosened policy last week as U.K. Prime Minister Liz Truss pushed tax cuts. Conversely, the monetary side is tightening.
- We are in favor of tax cuts, but they must be met with reductions in fiscal spending. The U.K. operates a “Socialism Lite” fiscal model, thus there is plenty of room to cut spending either in the absolute sense, or by spinning out certain operations and services (Healthcare comes to mind), to the private sector.
- I would categorize the U.S. as one notch below the U.K. and Western Europe on the “Socialism Lite” scale. The greater the spending on fiscal programs not tied to productivity (i.e. “entitlements” or “welfare” to put it more bluntly), the greater the economic burden and the weaker economic growth will be. By the way, welfare comes in two flavors – personal and corporate. The way the U.S. bond markets are behaving I fully expect something to break and for another Fed bailout to occur – either in the form of a direct corporate bailout or Quantitative Easing (QE). One could argue we have “QE Lite” as the Fed has slowed the pace of QT.