There are times when one needs to take action, and then there are times when one needs to do nothing but the timing is absolutely critical. Some say too much of a good thing is bad and others say – sometimes you need to do bad things to do good. The world operates in cycles for the most part. Seasons come and go, life and death is another cycle and history repeats itself. Some cycles come around as oscillations, a repeating variation around its central value, alternating between the highs and lows of its amplitude. Economic boom and busts, demand and supply, expansion and contraction and inflation and deflation are repeating cycles that oscillate. Monetary policy, liquidity, pump priming are all stimulants that try to mange this raging tiger. A key policy tool is interest rates and by either lowering or raising interest rates, central banks try to cool overheated economies or try to increase economies in the doldrums to robust growth.
Post the recession of 2008, the Quantitative Easing experiment got thrown into the mix. Did it work? Perhaps. Central bank purchases of treasury bonds, mortgage bonds and even direct purchases of equities did put a floor to falling prices and pumped liquidity into the market, largely as a buyer of last resort. The massive amounts of liquidity injections, or printing or money from thin air as some call it, unleased a decade of all time highs in multiple asset and debt classes – bond prices, equities, real estate, commodities – you name it. All this money at little or no cost – available at close to 0% interest. What is not to like here? Growth is good. Greed is even better. But eventually there comes a time to pay for all this largesse.
From Ben Bernanke who put the pedal to the metal on the printing presses to Janet Yellen and Jerome Powell that kept the pedal depressed and never stopped to try to get the world economy out of the recessionary gravitational pull it appeared that the world successfully achieved “escape velocity”. Finally out of the gravitational forces trap, the world economy rocket-ship was finally coasting in inertia. No resistance only forward movement. But wait, something is not right. The rocket thrusters deployed to achieve escape velocity have burned out and the steering controls do not work. No Control. Time to whip out the manuals to fix this rocket-ship and bring control back. But wait, where is the section on Quantitative Easing? There is no playbook? How did that happen?
Lets try to put this rocket into orbit first and think about other options later. Enter stagflation – High inflation, low growth for very long. This is where the old playbooks and policy levers do not work. Any attempt to increase interest rates prick the asset bubble and prices for all assets fall, especially debt. High inflation hits the poorest the most. Prices of basic essentials become unaffordable (case in point Sri Lanka and Peru). So now the rocket-ship just floats around – unable to reach its destination and the pilot has no control.
Extra-ordinary times need extra-ordinary measures. Agreed. But those measures need to be normalized very quickly to let market forces take over. The world is fully capable to heal itself, without too many external forces that destroy your natural immunity and ability to fight back, especially toxic medication, like free money, 0% interest rates and quantitative easing. Yes the intention was good to relieve the pain but that was simply treating the symptom and not the cause. Meanwhile the oscillation cycles are increasing in frequency and amplitude. Each high is higher, each trough is lower. In past cycles, the individual balance sheet blew up, then a few corporate balance sheets short circuited and then a few banks lost power, now entire countries and governments are at stake. All or nothing bets where the Hero walks away with the jackpot only happens in the movies or does it? Money has a cost and has the right to earn a return for it’s use. When interest rates are artificially suppressed and the principles of finance are weakened, unintended consequences result. One needs to know exactly when too much of a good thing is bad. More debt is not the solution for treating painful debt. Personal gain for collective pain is a very poor tradeoff. What will it take to right this ship? Counter cyclical measures, discipline, tolerating pain and hard work. There are no short-cuts.
As the captain of Starship Enterprise used to say – lets boldly go where no man has gone before. The world can hardly wait.