How one lost decade will haunt the US
And just like that, our four-day break nears an end.
I hope you enjoyed the time with your family. And perhaps even managed a sneaky chocolate egg for breakfast yesterday…
But the downtime must come to an end tomorrow.
That means time to look at the markets once more.
However, today I thought we could take a look at something Jim and I worked on last week.
And that was a stark warning from the Bank for International Settlements (BIS).
In its latest report, ‘What anchors for the natural rate of interest?’, the BIS has warned central banks need to factor in future monetary policy decisions when making today’s policy decisions:
‘If, as a result, debt continues to rise in relation to GDP or does not adjust sufficiently, a “debt trap” might emerge: it would become harder to raise interest rates without causing damage to the economy owing to the large debt overhang.
‘The important role that debt service burdens play in influencing expenditure underlines this possibility.
‘As a result, low rates beget lower rates. This is a form of “time inconsistency” that can be more insidious than the familiar one in the context of inflation (Borio (2014)) … the data indicate that this possibility should not be dismissed out of hand.’
In normal-people speak, the BIS is saying that lower and longer-held interest rates only add to the debt burden.
So every time the central banks change interest rates today, they need to factor in not only the impact tomorrow, but the impact in a decade — or many decades! — to come.
How? Check this out…
The debt trap
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The chart above shows us the cumulative effect of low interest rates among the G7 countries (Japan, Italy, the United Kingdom, Germany, France, the US and Canada) plus China, less consumer price inflation.
Furthermore, this total debt is rapidly increasing as both official inflation rates and interest rates fall over time.
Granted, this is a complex chart. And the scale on either side probably doesn’t make much sense.
But it does give you an idea of the problem.
We are almost two decades deep into low rates and central bank money printing. Both of which have sleepwalked developed economies into an unrepayable debt trap.
As dull as the working paper might be, it neatly matches with Jim’s articles this week.
As he points out below, the US is on the verge of a lost decade. The greenback is under threat. And the Fed may become Trump’s puppet.
Combine all this information together, and you are looking at powerful elites and central bankers scratching their heads, trying to work out how to get out of this mess.
The problem is, they can’t. The very model of modern-day monetary policy is under threat.
I’ll leave the rest up to Jim to explain.
Until next time,