Too much focus on minutia

A quick round up of what’s making the news: inflationary pressures are being focused on at the expense of positive growth, at least in those economies with a bit of both. We seem to be concentrating on the minutia rather than big picture. Every uptick in inflation heralds the arrival ever nearer of the four horsemen. Some prices seem to be hard wired to specific economic data, while others that you would normally expect to be more significant have all the effect of trying to push a supertanker with a bit of damp spaghetti.

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Last month I waxed on about the UK facing inflationary pressures, with more in the pipeline and a clear cut economic reason why rates should start rising. I also spoke about why the numbers will be ignored and hands sat on, all for the greater good. It’s partly the reason I can’t get too excited by economic data anymore. The political will and social impact that the tough decisions of raising interest rates will hold more sway. Add in to this mix the fact that it will be a bunch of bankers making the call on when to turn the credit screws on life’s rack and you can probably start to see that politics will play a much more important role than purely economic numbers. Politics always plays a part in determining the timing of rate moves, just that outwardly it will be a much move obvious than in the past.

This leads me nicely into what happens next: will there be more hands on involvement of trade imbalances, price manipulation, and more layers of oversight? It’s possible. As with everything these days there always has to be a reason, an explanation, someone to blame, even though there is usually a unique set of events that precedes every bubble. Chaos theory is not that chaotic when you use it to try and trace back the pivotal moment in history that started the ball rolling. 

Many people blame Bill Clinton for signing into law two key pieces of legislation: the Financial Services Modernization Act of 1999 and the Commodity Futures Modernization Act of 2000. These laws, by all accounts, set about lowering the standards for loans and setting lower hurdles for Freddie Mae and Fannie Mac. This set about a chain of events that nearly brought the banking world down. This is an abridged version of events and over simplified, but to try and explain all the connections would take a book, and that’s been done before. Suffice to say that politics has played a rather large role in messing things up and will no doubt play an equally large role in doing it again. Not quite butterflies in Brazil and tornados in Texas but affordable housing and banking implosions.

It will be interesting to see if this current environment sparks another tsunami in years to come by political shortcomings. He should have looked at derivatives!

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Phil Turnbull, Butterfield Bank

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