The Daily Parker

After Chancellor Kwasi Kwarteng's shocking mini-budget announcement last week, worldwide markets (and the IMF) have clobbered Sterling and the Conservative government in general. Today the Bank of England intervened in bond markets to try undoing the worst damage:

The Bank will start buying government bonds at an "urgent pace" to help restore "orderly market conditions".

So called Liability Driven Investment funds - which support defined benefit pensions schemes - were facing a collapse in the value of the bonds they hold, which in turn could have forced them to rush to sell other assets, sparking yet more market panic.

The Bank has already said it will "not hesitate" to hike interest rates to try and protect the pound and try and stem surging prices. Some economists have predicted the Bank of England will raise the interest rate from the current 2.25% to 5.8% by next spring.

Despite the Bank's action, the pound continued to fall with some analysts warning it could even reach parity with the dollar.

"What today shows us, is that the market doesn't see this as a problem that just the Bank of England can clean up," said Jane Foley, a currency strategist at Rabobank. "This is just firefighting".

Economist Tony Yates, formerly of the Bank, believes the markets expect a reversal to the Tories' new policy, either as a volte-face soon or at the next election:

The combination of falling sterling and rising rates is particularly damning. Normally a country embarking on a monetary-policy contraction to combat an inflationary surge—imparted by a fiscal loosening—might be expected to see a rise in its exchange rate. But the government’s move has shaken markets’ faith in its fiscal competence and its grasp of macroeconomic realities. That loss of confidence produced the exchange-rate fall.

Mr Kwarteng’s delusions will come to an end. The worst return to reality would see Britain slide into a full-blown financial crisis. In this regard the fall in sterling is less important than the rise in the cost of government finances. That is partly because investors are demanding a premium: they expect to compensate themselves for the upheavals of recent days and the uncertainty they have introduced. (The economists Paul Krugman and Dario Perkins have called this a “moron risk premium”.) In a doomsday scenario this premium generates a self-fulfilling vicious cycle. It raises spending (on interest payments on existing government debt) and lowers revenues (a dearth of confidence will lead to less economic activity). This will raise the “moron premium” further, worsening the funding gap. And so on.

Ironically the fiscal plans of a prospective left-wing government are providing the confidence anchor for the right-wing government it is expected to defeat in the next election. And the more this is expected to happen, and the sterner and clearer Labour’s plans become, the less awful the crisis will be in the meantime. The stupidity of Mr Kwarteng’s policy and its unpopularity are helping to limit the damage done by it. Markets believe that things won’t carry on as they are indefinitely.

Of particular concern, most mortgages in the UK have floating rates, unlike here in the US where fixed rates are most common. So the rising interest rates and declining pound will start hitting mortgage borrowers hard, just when gas prices blow up later this autumn.

I only wish I had a few extra bucks right now for a trip to the Ancestral Homeland. Given the current Tory resistance to change in the face of direct evidence, though, I suspect the exchange rate will remain pretty favorable to Americans through the winter.

Someone—who, pray, could it be?—apparently blew up two parts of the Nord Stream 1 pipeline that brings gas from Russia to Europe:

European officials on Tuesday launched investigations into possible “sabotage” following three mysterious leaks in the Nord Stream pipelines, built to carry Russian natural gas to Europe, after the system operator reported “unprecedented” damage to the lines in the Baltic Sea.

The damage — which seismic authorities registered as two significant underwater explosions — drew immediate accusations from European leaders that Russia was to blame. They offered no immediate evidence. But some officials suggested it might be revenge for Europe’s efforts to find alternatives to Russian natural gas or a threat that other gas pipelines that crisscross the Baltic Sea were vulnerable — including one inaugurated on Tuesday.

The leaks had no immediate impact on energy supplies to the European Union, since Russia had already cut off gas flows. But gas had remained in the pipes, raising concerns about possible environmental harm from leaking methane — the main component of natural gas and, when in the atmosphere, a major contributor to climate change. Images supplied by the Danish military showed gas bubbles reaching the surface of the water.

A senior European defense official and a European environmental official said that the primary, most obvious suspect behind the leaks was Russia. Russian officials had a motivation: sending a message to Europeans about the consequences of getting gas via the new Baltic pipeline. They also have the capability: a robust submersible program.

“No one on the European side of the ocean is thinking this is anything other than Russian sabotage,” the environmental official said, speaking on the condition of anonymity to discuss internal thinking about the leak.

I expect that the US Navy knows exactly what happened, and the Russian Navy probably knows we know, but it'll take some time for declassified reports filter out to the public. That said, if our navy knows, then we would have shared that info with the UK and most of NATO by now. I'm going to watch what the diplomats say for the next week on this.

The pound fell to $1.033 in early trading this morning before rebounding to the still-ahistorical $1.08 by mid-day:

Chancellor of the Exchequer Rishi Sunak hasn't had the job for three weeks and he's already tanked British currency markets. The Guardian's economics editor Larry Elliott calls the mini-budget that started this catastrophe a "schoolboy error:"

Part of the story of the pound’s weakness is a function of dollar strength but that does not explain why sterling has fallen so rapidly since the end of last week. There are three UK-related factors behind the fall.

First, once a currency hits the skids it is hard to stop it. Momentum trading took over in the aftermath of Kwasi Kwarteng’s mini-budget and it has proved hard to halt.

Second, Kwarteng committed a schoolboy error by pledging further tax cuts in a full budget planned for later this year. If the markets are worried about the state of the government’s finances and the increase in borrowing needed to fund your plans, it is not the wisest course of action to add to those concerns. Kwarteng’s inexperience has been exposed.

Third, the financial markets don’t really know how the Bank of England will respond to the events of the past three days. Threadneedle Street raised interest rates by half a point last Thursday but there has been speculation of an emergency meeting of the Bank’s monetary policy committee as early as Monday.

The Economist expands:

Five-year British yields have risen from 1.5% at the beginning of August to above 4.5% now: an increase of about one percentage point in just two days.

That combination of rising yields and a falling currency has prompted discussions of a broader crisis of confidence in Britain’s economy and its assets. The government’s tax cuts will mean a growing budget deficit and higher public-debt levels in the future. Britain’s current-account deficit reached 8.3% of gdp in the first three months of the year, the deepest in modern history, driven by surging energy prices. A gaping current-account deficit is something that often worries those who invest in developing economies.

But in other ways Britain is an unusual candidate for a currency crisis. Its exchange rate is flexible, meaning that there is no link to another currency, as was the case when Britain was forced out of the European Exchange Rate Mechanism in 1992. Its financial markets are deep and sophisticated. It has minimal debt denominated in foreign currencies, and its central bank is independent from the government.

The most simple explanation for the sell-off, then, is that investors do not believe that the government’s tax cuts will lead to the real economic growth Mr Kwarteng wants. Instead, they foresee higher inflation that the Bank of England will be unwilling to fully offset with interest-rate increases. Currency analysts at the Bank of America suggest that a combination of Britain’s changing fiscal stance and the long-running effects of its decision to leave the European Union have led to a profound rethink of the pound by investors. That leaves the currency more vulnerable in the years ahead.

I was joking with friends that I should hop over there to finally get a pint and a bap for under $10, until one of them pointed out that it would be a $1210 pint and bap given airfares and hotel costs. Ah, well. It doesn't look like the pound will recover before the end of the year, so maybe Christmas in London again? Any bets on whether PM Liz Truss will have to call an election before then?

The local alderman's office sent me an update this afternoon on Metra's and the Union Pacific Railroad's stupefying 9-year mission to construct a single station platform that thousands of commuters per day would like to start using:

I spoke to the foreman this week who, unfortunately, informed me of further delays on this project. The project is still awaiting a delivery of tiles from the manufacturer who, due to one person catching Covid recently, has informed them that the tiles won't be ready until the end of the year. This is on par which many of the delays on this project, which have been due to supply chain issues.

This pushes final completion of the project closer to March of next year. We are in communication with Metra to see if they might be able to reopen a portion of the station to commuters before that date, as most of it is complete by now.

Yes, of course: the tiles. It took me a moment to realize that the foreman meant the tiles that will cover the walls of the stairwells and ramps from the street to the platform, which I expect will reduce maintenance costs. All things equal, tiles are probably easier to clean than concrete.

Looking across Lawrence Avenue at the yet-to-open platform, though, I would say it just needs guardrails so people don't fall onto the street below.

But when I'm standing on the "temporary" 10-year-old platform across the street in a snowstorm some Monday morning this winter, I'll comfort myself knowing I'm doing it for the tiles.

UK Chancellor of the Exchequer (equivalent to the US Treasury Secretary) Kwasi Kwarteng (Cons.) announced significant tax cuts along with £72 billion in new spending to forestall higher energy bills this winter. Unfortunately, this massive stimulus comes during some of the highest inflation the UK has seen in a generation, estimated to be nearly 10% annualized as of this week.

Consequence? This, as of just a few minutes ago:

Sterling hasn't gone below $1.10 since 1985, and it probably won't again during my lifetime.

The Economist has no confidence in the scheme:

[Prime Minister Liz] Truss’s attempt to emulate the Gipper’s success is doomed. To see why, consider the currency markets. Reaganomics was accompanied by a strengthening dollar. So were Donald Trump’s tax cuts in 2018, which also happened alongside monetary tightening.

In Britain, though, the pound has slumped by 16% against the dollar in 2022.

As a result, the BOE will get no help from currency markets as it offsets Ms Truss’s fiscal stimulus with tighter monetary policy. Instead more expensive imports are boosting inflation. That is a big headache for an economy that depends on trade as much as Britain’s does.

Ms Truss’s cheerleaders seem to have read only the first chapter of the history of Reaganomics. The programme’s early record was mixed. The tax cuts did not stop a deep recession, yet by March 1984 annual inflation had risen back to 4.8% and America’s ten-year bond yield was over 12%, reflecting fears of another upward spiral in prices. Inflation was anchored only after Congress had raised taxes. By 1987 America’s budget, excluding interest payments, was nearly balanced. By 1993 Congress had raised taxes by almost as much as it had cut them in 1981. If Britain’s government does not correct its course in the same way, the result will be more conflict between monetary and fiscal policies—and a risk that inflation becomes entrenched.

On the other hand, lower costs in the UK combined with the usual slowdown in tourism across the Atlantic in autumn have made this possible on a 21-day advance purchase:

If only I weren't moving or performing in an opera in the next eight weeks, I'd buy a ticket to London right now.

The President announced this morning that negotiators have reached a tentative deal between the railroads and their engineers and conductors, averting tonight's planned strike:

Freight rail companies and unions representing tens of thousands of workers reached a tentative agreement to avoid what would have been an economically damaging strike, after all-night talks brokered by Labor Secretary Martin J. Walsh, President Biden said early Thursday morning.

The agreement now heads to union members for a ratification vote, which is a standard procedure in labor talks. While the vote is tallied, workers have agreed not to strike.

The talks brokered by Mr. Walsh began Wednesday morning and lasted 20 hours. Mr. Biden called in around 9 p.m. Wednesday, a person familiar with the talks said, and he hailed the deal on Thursday in a long statement.

“Most importantly, for the first time ever, the agreement provides our members with the ability to take time away from work to attend routine and preventative medical, as well as exemptions from attendance policies for hospitalizations and surgical procedures,” the presidents of the Brotherhood of Locomotive Engineers and Trainmen and the Transportation Division of the International Association of Sheet Metal, Air, Rail and Transportation Workers said in a news release.

Excellent news for the unions! And for us travelers, and for us consumers. Whew.

Chicago's heavy-rail commuter district, Metra, started cancelling train service that would extend past the midnight-Friday start time of the planned nationwide rail strike. Well, taking the El to work instead of Metra adds about 9 minutes to my commute, so I'll have to deal with that on Friday, I suppose. Except that commuter rail shutdowns don't even start to illustrate how bad this strike could turn out for the US economy:

[A strike] would cause immediate problems for manufacturers, says Lee Sanders with the American Bakers Association. This is nationwide. And a broad range of manufacturers who get parts, packaging and raw material delivered by rail would be effected.

"If we don't get the ingredients that we need to our plants, we won't be able to make the products that we need to get our wholesome products to the consumers," Sanders says.

So, empty shelves are a possibility. Farmers are worried too about shipping grain. Dangerous chemicals have already stopped moving. Especially valuable goods are next, and passengers are getting stranded too.

Don't forget about coal, either. About 22% of US electricity comes from coal-fired plants, including 30% of Illinois' power. (As it turns out, Illinois has a higher proportion of nuclear power—about 54% of output—than any other state, which gives us a bit more reliability.)

I have a lot of sympathy for the engineers and conductors, whose schedules seem even less predictable than even fast-food workers. I hope the railroads agree to better scheduling and time-off provisions before Friday, or we're going to have a major economic disruption while we already have high inflation. Not a good combination.

My commute to work Friday might get a little longer, as Metra has announced that 9 out of its 11 lines (including mine) would likely not operate if railroad engineers and conductors go on strike Friday. Amtrak has already started cancelling trains so they won't get stranded mid-route should the strike happen.

In other news:

• Cook County tax bills won't come out until late autumn, according to the County President, meaning no one knows how much cash they have to escrow when they sell real estate.
• The Post has an interactive map showing everywhere in the US that hit a record high temperature this summer.
• US Rep. Marjorie Taylor "Still Smarter than Lauren Boebert" Greene (R-GA) has come up with a climate-change theory so dumb it actually seems smart.
• US Sen. Lindsay Graham (R-SC), another intellectual giant of the 117th Congress, proposed a Federal abortion ban, demonstrating a keen command of how most people in the United States view the issue.
• Robert Wright explores "why we're so clueless about Putin."
• Block Club Chicago explains why my neighborhood and a few others experienced massive geysers coming out of storm drains during Sunday's flooding rains.

Finally, right-wing lawyer Kenneth Starr died at age 76. No reaction yet from Monica Lewinsky.

With the death of Queen Elizabeth II, the British National Anthem has changed back to "God Save the King" for the third time in 185 years. In other news:

• The Guardian explains Elizabeth's funeral and other events that will take place over the next 10 days.
• James Fallows takes a second look at President Biden's speech from last week, in the context of the predictable reaction cycle about anything he does.
• Dana Milbank doesn't worry the MAGA folks want a Mussolini, since some of them keep going on about having a Caesar instead.
• Tina Nguyen wonders what Liz Cheney actually plans to do now.
• Matt Ford says, welp, "there are 'Trump Judges' after all."
• The Economist projects that the Democratic Party will keep its majority in the Senate come January, and probably even pick up a seat.
• Why is the United States the deadliest country in the OECD?
• Via Schneier, Facebook admitted it has no earthly idea what data it has on anyone.

By the way, the UK has a vacancy for the post of Prince of Wales, in case anyone would care to apply. I think we can bet on nepotism, though.

I took Friday off, so it felt like Saturday. Then Saturday felt like Sunday, Sunday felt like another Saturday, and yesterday was definitely another Sunday. Today does not feel like Tuesday.

Like most Mondays, I had a lot of catching up at the office, including mandatory biennial sexual harassment training (prevention and reporting, I hasten to point out). So despite a 7pm meeting with an Australian client tonight, I hope I find time to read these articles:

• The Chicago Bears have revealed a preliminary map of the Arlington Park redevelopment that includes a new football stadium. At least it has a Metra station, so people might actually not have to drive to see the games.
• Music critic Jim DiRogatis, who broke the R. Kelly rape story for the Chicago Sun-Times, moved to quash a subpoena in Kelly's ongoing trial.
• Michael Tomasky thinks the XPOTUS will destroy the Republican Party before he destroys democracy in America, but that ship might already have foundered.
• Paul Krugman argues that President Biden's economic policies have been great for workers.
• Strong Towns explains how McMansions aren't just ugly, they're also bad for their towns.

Finally, the Hugo Awards were announced in Chicago over the weekend, and now I have a ton more books to buy.