I have already posted that I see a lot of sense in the arguments of those market commentators who say that central banks’ determination to crash the economies of the developed world into recession, even suggesting that stock markets being positive is unhelpful, is the worng strategy because it is manifestly not working and in any case it is policy reaction appropriate to different causes. We have been getting supply side driven inflation and the reaction has been appropriate to demand led.
I saw UK inflation numbers after first publishing this post and that is more evidence of supply side issues (food costs) feeding into the numbers.
A common analogy for the inflationary risks and the chosen policy strategy is of a car accelerating too fast where a bit lighter foot on the throttle might be appropriate but a panic stricken novice driver jams on the brakes very hard. The ‘novice’ driver in this case is the boss of the US Federal Reserve who is after all a lawyer by training and an investment banker with a rather patchy career prior to getting public appointments. Indeed, he could himself be blamed for feeding asset price inflation (now much frowned on by some other central bankers) in the response to Covid-19.
Modern anti-lock braking systems mean that in most situations the car won’t slide across the road when you max out the brakes with your right foot (exactly what happened to me in my first driving test emergency stop) and you get feedback in the form of pedal judder and a flashing light. Very useful when driving down steep hills on snow and ice!
It is now obvious that the failure of SVB and Signature Bank was a combination of inadequate regulation (that being the consequence of over influential lobbying in the USA) and the extremely fast and steep rises in interest rates from a base of virtually zero. You can read many more detailed explanations all over the internet.
