Plus, the UK Hints at a Hike in Interest Rates
Welcome to your Sunday digest…my weekly breakdown of the things we’re thinking about and talking about in the Global Intelligence world.
First up this week, messy transitions.
Humans are storytellers. We like to think about periods of time as chapters…as though one ends and another neatly begins, with little or no transition between them.
However, in life, the economy, and pretty much everything else, there is always a period of messy transition between one chapter and the next.
That’s where we exist today.
Right now, we’re sitting in this sort of bizzaro-world between a pandemic that stubbornly refuses to exit stage left, and a global economic recovery that keeps fumbling around trying to remember its lines.
To wit, this week we learned that U.S. economic growth may have slowed significantly this fall amid supply chain disruptions, worker shortages, and continuing concerns about COVID.
That’s according to a report by the Federal Reserve known as the Beige Book, a collection of anecdotes from businesses around the country. Many of the businesses in the report said they expect the shortages of workers and goods to continue for another year.
These concerns about a slowdown are shared by economists surveyed recently by The Wall Street Journal. In this survey, they estimated U.S. economic growth fell to around 3% from 6.7% between the second and third quarters of this year.
Economists are similarly predicting a decline in growth in the world’s second-largest economy, China. Expectations are that China’s growth dropped to 5.1%, from 7.9% in the previous quarter.
While analysts had expected growth to slow as the year went on, these slowdowns are sharper than anticipated. They unfortunately indicate that the economic recovery from the pandemic will be longer and messier than government and mainstream media outlets are telling us.
And here’s the kicker…inflation will remain a problem. So much so that the Fed will be forced to raise rates. Stir that all together and that smell coming from D.C. is the early whiffs of 1970s-style deflation. More on that to come…
Next up, the U.K. is preparing to hike interest rates.
Earlier this week, Andrew Bailey—governor of the Bank of England, the U.K.’s central bank—suggested interest rates may soon rise over inflation concerns.
The inflation rate in the U.K. eased slightly to 3.1% in September, from 3.2% in August. But it remains well above the Bank of England’s target of 2%.
A key reason for this stubbornly high inflation is elevated prices at the gas pump, which are at their highest levels for eight years. This is part of the trend I’ve been predicting since near the start of this year…that oil and gas prices are going to reset higher.
It’s also partly a function of Brexit. Cool Britannia? Try: Fool Britannia. Who couldn’t see all this disruption happening when the U.K. opted out of one of the largest free trade zones in the world, right on its doorstep?
Bailey said the spike in energy prices would mean inflation remains high for longer than previously thought. (Meaning that he also has now admitted that inflation is not “transitionary,” as the Fed and other central banks have been trying to claim for months.)
Bailey did not indicate when rates might rise, but the likelihood is that the hike will occur late this year or early next.
While other countries like Norway and New Zealand have already boosted rates, the U.K. would be the first large Western economy to bite the bullet on a rate hike.
And if the U.K. feels backed into this corner, it likely means that Uncle Sam will soon have to act too.
Finally this week, a note on stablecoins.
Stablecoins are cryptocurrencies that very closely shadow an underlying asset, most commonly the U.S. dollar.
These are a key facet of the cryptoconomy, since they allow traders to quickly move between a volatile asset like bitcoin and a very stable crypto that tracks the U.S. dollar precisely, like U.S. Dollar Coin (USDC).
Stablecoins also enable cautious investors to get involved in the cryptoconomy without having to buy bitcoin, Ethereum, or any of the other cryptos that can rise or fall by 10% or 20% in a single day.
The mark against stablecoins has always been that if and when the Fed develops a central bank digital currency (CBDC), a crypto version of the dollar, then stablecoins will become obsolete.
This week, however, former Federal Reserve Bank of Boston President Eric Rosengren nixed this idea, saying a Fed-issued CBDC would operate alongside stablecoins.
Rosengren is thought to be well-informed on these issues since the Boston Fed, which he resigned from just this month, is working with the Massachusetts Institute of Technology to determine whether the U.S. should issue a CBDC, and if so, how the process should be conducted.
It’s heartening to hear a senior Fed official in this space promote a future for stablecoins.
In a world where the Fed issues digital dollars, financial privacy—which I believe to be an inalienable right—could disappear. Uncle Sam could potentially use a digital dollar to track every single purchase you make and every single dollar you earn.
However, if the Fed chooses to support stablecoins alongside a digital dollar, that would at least allow consumers to trade out of their government-issued crypto into private sector alternatives.
Of course, it’s unclear at this point where other Fed officials share Rosengren’s outlook on stablecoins.
We will likely gain more insights in this regard in the coming weeks when the Fed is expected to release its highly anticipated report on a potential digital dollar. I’ll bring you more details on that when they become available.
That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, please reach out through the contact form on the Global Intelligence website. I’d love to hear from you.