A radical theory is spreading as economy defies expectations
What If Fed Rate Hikes Are Actually Sparking US Economic Boom?
It’s an idea so radical that in mainstream academic and financial circles, it borders on heresy — the sort of thing that in the past only Turkey’s populist president, Recep Tayyip Erdogan, or the most zealous disciples of Modern Monetary Theory would dare utter publicly.
But the new converts say the economic evidence is becoming impossible to ignore.
The expansion now is as strong or even stronger than it was when the Federal Reserve first began lifting rates.
The jump in benchmark rates from 0% to over 5% is providing Americans with a significant stream of income from their bond investments and savings accounts for the first time in two decades. “The reality is people have more money,”
These people — and companies — are in turn spending a big enough chunk of that new-found cash, the theory goes, to drive up demand and goose growth.
Kevin Muir and the rest of the contrarians — Greenlight Capital’s David Einhorn is the most high profile of them — say it’s different this time
The impact of exploding US budget deficits
The economist Warren Mosler many years ago as one of the most vocal advocates of Modern Monetary Theory, or MMT, his interpretation was long dismissed as the preachings of an eccentric crusader.
Einhorn, one of Wall Street’s best-known value investors, came to the theory earlier than Muir, when he observed how slowly the economy was expanding even though the Fed had pinned rates at 0% after the global financial crisis.
Einhorn notes that US households receive income on more than $13 trillion of short-term interest-bearing assets, almost triple the $5 trillion in consumer debt, excluding mortgages,
Like the converts, Mark Zandi, chief economist at Moody’s Analytics, cites another key factor for this resilience:
Many Americans managed to lock in uber-low rates on their mortgages for 30 years during the pandemic, shielding them from much of the pain caused by rising rates.
Eigen, a bond fund manager at JPMorgan Chase, isn’t an outright proponent of the new theory, has two side hustles outside of JPMorgan.
He runs a fitness center and car repair shop. At both places, people keep spending more money, he says. Retirees, in particular. They are, he notes, perhaps the biggest beneficiaries of the higher rates.
“All of a sudden, all of this disposable income accrues to these people,” he says. “And they’re spending it.”
Ye Xie Bloomberg 16 april 2024
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