Paul Mortimer-Lee, a veteran economist, warns that central banks have gone overboard with their economic medicine and are at risk of causing a financial crisis. The financial system has become reliant on low interest rates, and the sudden tightening of monetary policy could have severe consequences. Mortimer-Lee criticizes central banks for their excessive stimulus measures during the COVID-19 pandemic, which he believes were unnecessary and have led to high government deficits. He argues that the housing market and the money supply figures indicate potential risks of a recession and deflation. Mortimer-Lee predicts that central banks will be forced to reverse their policies next year, but governments will struggle to respond effectively due to high budget deficits.
Jim Leaviss of M&G Investments also discusses the risks associated with central banks and the potential for increased borrowing costs to impact the economy. Leaviss compares central banks to steam trains, emphasizing the need for caution to prevent derailing the economy.
One of the challenges faced by central banks is the lag in monetary policy. Leaviss highlights that rate hikes may not effectively control inflation due to the time it takes for the impact to be felt. This delay could potentially lead to an economic downturn if borrowing costs rise sharply.
Another concern is the lack of buyers for US Treasuries now that the Federal Reserve has ended quantitative easing. This could result in a decrease in demand for US government debt and potentially impact interest rates.
Despite these concerns, Leaviss believes it is a good time to buy government bonds. He has reduced exposure to investment grade corporate bonds and does not hold any high yield bonds. M&G Investments still maintains around 15% exposure to emerging market debt.
Investors need to be mindful of the risks associated with increased borrowing costs and the potential impact on the economy. Leaviss' perspective provides valuable insights into the current challenges faced by central banks and the importance of careful monetary policy decisions.
Jamie Dimon, CEO of JP Morgan, warns of the risks posed by trillions of dollars in stimulus cheques and bond purchases by central banks. He likens the money injected into the economy to heroin, stating that it makes consumers feel good and boosts stock markets and company profits. However, Dimon cautions that when government support and cheap cash are withdrawn, companies could see significant drops in profit. He praises the UK economy for its innovation and pro-growth policies but warns that the US economy's positive outlook must be considered in the context of massive government spending. The Bank of England Governor, Andrew Bailey, acknowledges that the UK's potential growth rate is lower than in previous years. S&P Global analysts warn that the UK may face stagflation due to high interest rates. The article also mentions comments from Stephen Schwarzman, CEO of Blackstone, who praises the UK's pro-business stance and criticizes US President Joe Biden's debt-fueled Inflation Reduction Act. The article concludes with a mention of the record usage of buy now, pay later services by price-pinched holiday shoppers on Cyber Monday.
Bernard Connolly, an esteemed consigliere to hedge funds and central bankers, warns that the Federal Reserve faces a choice between allowing a deep economic slump or slashing rates before inflation has fallen back to target. Connolly predicts a US recession unless the Fed loosens hard and soon, citing a weakening labor market and exhausted pandemic-era handouts. He suggests that the Fed will hold off cutting interest rates just yet, but by mid-year, the weakening economy will become evident. The next step will be highly political, as Fed officials fear the prospect of a second Trump presidency and the potential for inflationary fiscal dominance. Connolly points to an initial rate cut in June, followed by cascading cuts in rapid succession. He argues that central banks have created a chronic misalignment in western economies by allowing asset booms to run unchecked and preventing the economy from coming back into balance during downturns. He warns that deflation will continue to haunt the economy due to aging demographics, digital technology, and the Asian saving glut. Connolly criticizes the canonical DSGE model used by central banks, arguing that it assumes the economy comes back into equilibrium when it does not. He suggests that the model is defective and that other voices have been shut out of the debate. The article concludes by stating that the priests were wrong in 2007-2008, and it remains to be seen who will be wrong this year.
The article discusses the book 'The Price of Time: The Real Story of Interest' by Edward Chancellor, which explores the impact of ultra-low interest rates on the economy. The book argues that low interest rates contribute to various economic problems, including unaffordable housing, rising inequality, and financial fragility. It traces the history of interest rates and connects the social and market outcomes with the broken money markets. The author criticizes central bankers for their lack of understanding of the monetary and financial system and their attempts to manipulate it. The book calls for a return to a market-determined interest rate rather than one set by central bankers. The article highlights the relevance of the book in the current context of concerns about inflation, the Federal Reserve, and interest rates. However, it notes that the book has received limited attention and praise, primarily from right-leaning press and hard-money advocates. [ff1e42df]