Each has masked the weakness of underlying growth.
As successive bubbles pop, the economy fails to self-correct by the normal process of the business cycle. It takes ever more monetary stimulus to right the ship.
It was the dotcom equity boom in the late 1990s, the US and Club Med property booms in the 2000s, the QE asset boom and China’s credit spree in the post-Lehman 2010s.
Today we are in the final phase of the great fiscal boom. Budget deficits ballooned to wartime levels on both sides of the Atlantic during Covid. These have yet to come down to tenable levels.
“Politicians have got into the habit of spending money like there is no tomorrow, and the population likes it. Sooner or later the bond market is going to throw another tantrum,”
Once this fiscal bubble bursts, or simply sputters out, the contractionary effect will in my (unfashionable) view knock away the central prop of the global economic recovery
The consensus view at the US Federal Reserve, the European Central Bank and the Bank of England is that the Wicksellian “natural” rate of interest – known as R* – has jumped to a permanently higher level.
Philip Turner, a former top official at the Bank for International Settlements, and Marina Misev from the University of Basel, warn that central banks are being misled by false assumptions about R* into dangerous overtightening, risking a global credit crunch and an asset crash.
The consensus New Keynesian view is that the world has jumped to a new regime of much higher interest rates and governments must cut their fiscal cloth accordingly.
The rival Wicksellian view is that the world economy cannot endure such high rates for long. If the Wicksellians are right, central banks will discover that R* has crumbled beneath their feet.
The ECB and then the Fed will have to carry out a violent policy pivot, slash rates, and ultimately mop up debt with fresh QE.
Almost nobody in the markets is prepared for that surprise.
Ambrose Evans-Pritchard Telegraph 14 November 2023
Higher Interest Rates Maybe Forever - rising ‘neutral rate’
Grundbultsfrågan: Hur blir S = I ??? Savings and investment, being different activities carried on by different people
why does the economy have to be stimulated in artificial ways through the boosting of lending ?
Nivån på den neutrala räntan Englunds lag 3
R-star and predictions that inflation and rates will fall to pre-pandemic levels
Biggles löser finanskrisen