Henceforth the economy can cope with sharply higher borrowing costs. 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. It may already have begun.Ĭentral banks will then have to slash interest rates much faster than their “higher for longer” protestations would suggest, and perhaps revert to emergency QE to head off a deflationary bust. 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. Sooner or later the bond market is going to throw another tantrum,” said Mark Dowding from BlueBay Asset Management. “Politicians have got into the habit of spending money like there is no tomorrow, and the population likes it. These have yet to come down to tenable levels. Budget deficits ballooned to wartime levels on both sides of the Atlantic during Covid. Today we are in the final phase of the great fiscal boom. 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. It takes ever more monetary stimulus to right the ship. Each has masked the weakness of underlying growth.Īs successive bubbles pop, the economy fails to self-correct by the normal process of the business cycle. The world economy has been kept afloat for a quarter century by serial bubbles.
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