Are we facing an economic disaster?
One argument you often see being made by pundits today – particularly those who have a “secular stagnation” view of the world – is that there’s nothing to lose by conducting extreme monetary policy.
Given the risks involved in a deflationary world, it can’t hurt to fight it in any way possible.
But everything has consequences, and you can’t expect to keep interest rates at current levels without distorting the market in some way.
Bottom Line: I strongly believe that central bankers’ actions have put the global economy today in a very dangerous position.
Interest rates are too low. As a result, we’re seeing a replay of the mid-2000s – when interest rates were too low given economic growth, and as a result, the bubble in US subprime property was inflated. And when it blew up, it triggered the global financial crisis.
I am afraid a similar thing is happening today. Even though the US economy is growing, interest rates are lower than they’ve ever been. It’s hard to argue that current conditions justify that level of emergency intervention.
If you look at the real root cause behind the financial crisis, we’re doubling down. Our monetary policy is so much more reckless and so much more aggressively pushing people out of the risk curve.
When you have zero money for so long, the marginal benefits you get through consumption greatly diminish, but there’s one thing which doesn’t diminish, which is unintended consequences.
The danger of keeping monetary policy so low for so long is that people make bad investments. They invest because they feel they have to, rather than because they think the potential returns are genuinely attractive. They’ll buy anything that promises a half-decent income, rather than looking for value and low-risk.
Take a close look at the US public markets today. They are way overvalued. Around 80% of new IPOs make no profits. That’s a proportion only seen before during the tech bubble in 1999. And 71% of the corporate debt issued in the last two years has been ‘B’ rated. That compares to just under 30% in 2006/07.
In other words, poor quality companies are finding it easier and easier to raise money, whether through equity or debt.
What’s the likely outcome of that? I am afraid an economic disaster is inevitable no matter how you slice it.
…. But although I might not approve of money printing particularly, it doesn’t mean I won’t take advantage of it when it happens – and nor should you.
Share your thoughts…