The Hangover

Beware the morning after.

First the revelry….then the headache. In recent weeks, the markets have lurched in fits and starts, like a drunk after a particularly riotous bachelor party. And the fog cleared from its aching head, it seems to have come to the conclusion that the party is just beginning.

If only. Even as a consensus emerges that the recession may be bottoming out, the powers that be cast a dark pall over the revelry with a grim promise: the riotous excesses of the bailout are going to cause a hangover of monumental scale.

First, there’s the matter of interest rates. The Bank of England has flooded the financial system with a sea of cheap money, to keep us spending furiously. Deflation was deemed a lurking terror to be banished by patriotic consumption. But eventually, interest rates have to rise, as this article notes. We simply have to save more.

What is more, as the gargantuan scale of government deficits becomes obvious, it’s clear that with so much money being sucked out of the financial system into the government’s black hole of a deficit, the cost of money must rise as the rest of us compete for what little is left.

Then there are taxes. The VAT holiday is ending, unlikely to be renewed. Higher VAT is unlikely to boost patriotic spending. The cash for clunker bribe scheme is likewise ending. The US Fed, like the BoE, must start planning to take back the money flood, lest they stoke another bubble. Party’s over, hangover starts.