Monday was just another horrible day for the markets

Photo-Illustration: Intelligencer. Photo: Leon Neal/Getty Images

Major stock markets in the United States fell again on Monday – not only hitting new lows for the year, but with the Dow Jones closing lower than the pre-pandemic peak reached in February 2019. Bad? Yes. But what is more concerning is what happened about 200 miles south of the New York Stock Exchange, at the US Treasury. There, officials held auctions to sell bonds that pay for the federal government’s ongoing operations. The price of these bonds helps define everything from credit card rates to monthly mortgage payments, and acts as an indicator of the severity of inflation. The auction made it clear that investors, by and large, do not believe inflation is coming to an end.

According to the results of today’s auctions, inflation should not only remain high over the next year, but also increase over the next two to three years. On Monday afternoon, bond investors appeared to expect the US annual inflation rate to remain above 4%, on average, until 2029. That’s double the Fed’s target of around 2% — something Wall Street has widely assumed will happen before too long.

It’s not just the US – bad news has been everywhere in financial markets lately, almost regardless of country, region or asset class. Everything from US stocks and emerging market currencies to gold and oil have plunged in value of late. After a terrific week of global disruptions, the world has shifted back to prepare for a weirder and longer period of economic reorganization than seemed likely just a month ago. Central banks, governments and investors are trying to figure out how much worse inflation is going to get, if the world is heading into a bad recession and how bad the financial hangover will be for all the lavish spending in the world. pandemic era.

The UK has been among the hardest hit in recent days – and, again, inflation is at the heart of the problem. Last week the UK government announced it was blasting its own budget with a series of tax cuts and spending plans to curb the absolutely crazy cost of energy there, sending the pound to its lowest point since the 1980s. Then, Monday morning, things got worse. The currency fell to its lowest level ever against the US dollar – as low as $1.03, from over $1.40 last year – and there seemed to be no real plan to cope. to the repercussions. The UK economy has come under similar pressure from price increase than the United States, although the British situation has been considerably worse due to soaring energy prices (energy bills are expected to reach 3,500 pounds per year for a typical household.) Prime Minister Liz Truss’ economic plan is a relic of the 1980s, when Margaret Thatcher and Ronald Reagan ruled on the promise that government austerity would pay off. (A research note from Goldman Sachs, of all places, points out that Reagan’s 1981 tax cuts were later reversed since they did not, in fact, pay for themselves). There were rumors that England’s central bank would counterbalance Truss’ debauchery with an interest rate hike, but that turned out to be untrue, a move that left the pound falling back near its lows, and claimed that – in the judgment of bond investors – the UK was less trustworthy repay one’s obligations than Italy or Greece.

The UK has very little money in its central bank coffers to defend its currency – remember, it was a problem for Russia when the world cut it off from its foreign exchange reserves, the preventing it from supporting its own currency during economic sanctions after invading Ukraine. For all the antics of Boris Johnson, Truss’ predecessor intended to raise the taxesand her rival for the Tory leadership had warned that tax cuts would only fuel inflation further. Now the British people find themselves with a weaker currency, with the likelihood of higher interest payments on the national debt.

Meanwhile, the eurozone is doing just as badly, with economic and geopolitical turmoil spreading unpredictably. Italy’s election of an unpredictable, fascist-sympathetic prime minister, Giorgia Meloni, only makes things crazier. A very Tucker Carlson style speech by Meloni has made the rounds on Twitter, but what might be more critical going forward is how she’s leading a right-wing coalition in negotiations with the European Central Bank, the ultimate authority on continental finance. . Meloni has not campaigned on a Brexit-style break with the rest of the eurozone, but could negotiate with Brussels to to loosen funding requirements or push the ECB to buy more of their bonds than, say, Germany – which only deepens investor uncertainty (and pessimism) about the state of Europe and the euro (these days it’s trading at 96 cents, down from a recent high of $1.25).

And then there is China. After spending around $1 trillion on its neocolonialist Belt and Road Initiative, where Xi Jinping’s government funds mining and infrastructure projects around the world, the country is slow-down its expansionary ambitions as the economy goes next to. China is in the midst of a housing crisis that has been going on for about a year, with landlords refusing to pay their mortgages. Ultimately, that means the world’s second-largest economy is cutting the world off from its money as it attempts to shore up its own finances.

The reality is that in just a few short years, the world has gone from having more money than it knew what to do with, to having a huge chunk of it sucked out of the financial system by central banks, with the Federal Reserve in the lead. What happens in these circumstances, when the global financial system lacks liquidity and inflation is still so high? Stay tuned!