Cassandra warned that central banks are pushing the global economy over the edge

Cassandra warned that central banks are pushing the global economy over the edge

His argument is that the financial system has become entirely geared toward low interest rates after nearly 15 years of cheap money in the post-2008 era. Many of the business models, investment ideas and hedging strategies that underpin the economy will fail now that interest rates remain high. For a longer period.

There have already been tremors: pension funds were forced to sell bonds quickly in the wake of the 2022 mini-Budget after the explosion of liability-based investment strategies.

“Everyone’s portfolio is set up for a completely different interest rate structure. You tighten very quickly that way, and bad things happen,” says Mortimer Lee, a Briton based in New York.

In his view, the original sin is that central banks went too far with quantitative easing during the pandemic.

The Bank of England has dramatically stepped up its purchases of government bonds, raising its balance sheet from £435 billion to £875 billion by the end of 2021. The European Central Bank and the US Federal Reserve have also injected extraordinary stimulus.

“These guys have gone crazy with Covid,” Mortimer Lee says. “Covid was temporary, but they did things with their balance sheets that were permanent. They did much more for Covid than they did in the wake of the more severe and longer-lasting global financial crisis.

“Interest rates to zero, buying up all the bonds that the government issues – that’s why the government deficits in the UK and the US are so amazingly high, because the money was free. It’s like giving a kid a credit card and saying ‘spend as much as you want’. This is What governments did.

Now the debt is due.

The BoE’s argument is that much of what we know now cannot be seen until it is too late.

Ben Broadbent, the bank’s deputy governor, said officials fear the end of the Covid furlough scheme will lead to higher unemployment rates.

The MPC waited until it became clear that there would be no jump in layoffs before tightening policy.

By then, inflation was already rising rapidly and the bank was forced to raise interest rates very quickly to limit the rise in prices: it raised interest rates from 0.1% in December 2021 to 5.25% today.

Mortimer Lee says that with similar moves from the Fed and European Central Bank, the outcome can only be ugly.

US companies face a “nightmare” next year, as cheap debt expires and has to be refinanced at higher costs.

“The housing market is a disaster waiting to happen,” he says, arguing that households have borrowed as if low interest rates were here to stay.

If he is right, why have we seen only a limited impact from higher borrowing costs so far?

    (tags for translation) Bank of England 

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