|From: elmatador||11/30/2022 9:12:03 AM|
|The Era of Easy Money Is Over. What Does That Change?|
Analysis by Jill R. Shah | Bloomberg
November 28, 2022 at 12:04 a.m. EST
An unparalleled era of easy money came to a screeching halt in 2022, as central banks shifted gears to fight inflation.
The US Federal Reserve raised its benchmark rate from near zero to 4% in a mere six months. Companies, countries and consumers that had borrowed heavily when doing so was cheap now faced new strains, just as banks rediscovered caution in lending.
This sudden tightening of credit conditions not only increased the risks of recession and defaults but raised worries about financial vulnerabilities emerging that had previously been covered up by borrowing.
1. Why was money so cheap for so long?
Central banks opened spigots wide to keep the global financial crisis from triggering a depression, using low interest rates and other measures to try to stimulate business activity.
They kept rates low for years in the face of a notably anemic recovery, then opened the faucets again when the pandemic struck: The Fed cut interest rates back to near zero and didn’t raise them until March 2022.
2. What did that lead to?
It helped fuel a period of extraordinary growth in US financial markets, save for the short, sharp pandemic drop in 2020. The US stock market rose more than 580% after the financial crisis, accounting for price gains and dividend payments.
It also led to a massive increase in debt taken on by companies and countries. From 2007 to 2020, government debt as a share of gross domestic product globally jumped to 98% from 58%, and non-financial corporate debt as a share of GDP surged to 97% from 77%, according to data compiled by Ed Altman, professor emeritus of finance at New York University’s Stern School of Business.
And in a hunt for better returns than safe debt assets like Treasuries offered, investors flooded companies with cash, buying bonds from risky ventures that paid higher yields while overlooking their lower credit quality. Yet despite the ballooning debt, inflation remained subdued in most developed economies -- in the US, it rarely reached the Fed’s target of 2%.
3. What changed?
Inflation arrived with a roar in 2021 as pandemic restrictions waned while supply chains remained disrupted. In 2022, exacerbated by energy shortages and Russia’s invasion of Ukraine, inflation reached over 9% in the US and 10% in the European region. Led by the Fed, central banks began raising interest rates at the fastest pace in over four decades. They’re aiming to slow growth by reducing consumer demand, hoping in turn that prices will cool, too. Between March and November, the Fed increased the ceiling of the rate it uses to manage the economy, known as the federal funds rate, to 4% from 0.25%. Economists expect the central bank will hike the rate to 5% by March 2023 and hold it there for most of the year.
4. What does this mean for investors and markets?
After the rate hikes began, the US equity market plunged as much as 25% from its peak, as investors braced for the slowdown the interest rate hikes would likely bring.
Bond prices fell by the most in decades, as the prospect of new issu-ances paying higher rates made existing low-yield bonds worth less.
Both investment-grade and high-yield companies cut back on borrowing. One of the most rate-sensitive areas of the US economy, the housing market, saw sales slow significantly. And newly cautious investors eschewed the riskiest assets such as leveraged loans.
5. What does it mean for consumers and companies?
For US businesses, average yields for newly issued investment-grade debt jumped to around 6% and high-yield debt jumped to nearly 10% by November.
That comes on top of higher labor costs, especially in sectors like health care. Home buyers are facing sharply steeper monthly payments, as the 30-year fixed mortgage rate topped 7%, the highest level in two decades.
And despite significant wage gains for US workers over the last two years, record inflation has begun to eat into incomes. Outside the US, the Fed’s rate increases also strengthened the dollar relative to other currencies, which meant that dollar-denominated sovereign and corporate debt in emerging markets became a lot more expensive to repay.
6. What risks come along with the shift?
Easy access to money in the US has led to higher and higher levels of debt among the riskiest corporate borrowers, especially those owned by private equity firms. A commonly cited measure of debt to earnings has ticked up in the leveraged loan market over the last 10 years.
That means portfolios of collateralized loan obligations, which are loans bundled into bonds, grew more exposed to risks as well.
Globally, zombie firms -- companies that don’t earn enough to cover their interest expenses -- have become more common.
Higher costs across the board -- for capital, labor and goods -- has created expectations that the default rate will rise, especially among highly indebted companies.
7. Could there be another financial crisis?
Lending rules were tightened after the collapse of credit markets in 2008. Yet the speed at which rates are being hiked is increasing fears that something in the financial system will break.
In September, a hedging strategy routinely used by UK pension funds backfired when yields on government bonds jumped faster than the models the funds used had allowed for. Intervention by the Bank of England was needed to calm market turmoil.
8. Are there reasons for optimism?
Yes, on several fronts. So far, US consumers and corporate borrowers broadly have been resilient. Easy access to markets in the wake of the pandemic enabled many companies to refinance their debt at low interest rates, meaning they won’t have to go back to the market immediately.
And pandemic stimulus payments and subsequent higher wages set up households with a cushion to weather some level of economic slowdown.
Overall, the share of risk in consumer obligations such as mortgages and auto loans has fallen since 2006, according to a UBS Group AG report.
©2022 Bloomberg L.P.
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|From: elmatador||12/1/2022 3:57:09 AM|
|Only now are the true costs of quantitative easing making themselves felt – all £200bn of them|
These are real losses the taxpayer is now being forced to pay to the commercial banking sector
JEREMY WARNER30 November 2022 • 11:00am
The direct fiscal costs of quantitative easing are beginning to materialise
Tricky stuff, quantitative easing. Many of us, including yours truly, were deeply suspicious of the manoeuvre when the Bank of England first embarked on QE in the immediate aftermath of the financial crisis.
To the intense irritation of the Bank of England, most journalists would routinely refer to the asset purchase facility (APF) as central bank money printing, plain and simple. No, no, no, said the Bank – it was merely another way of reducing interest rates so as to compensate for the deep recession of the time.
For a while, the official explanation just about held water; in its early years, QE didn't have the inflationary consequences many predicted, and eventually we all got used to it, so that as each successive crisis was met by another burst of money printing, we all just shrugged and said so-what? Perhaps there was such a thing as a free lunch after all.
The seed had nevertheless been sown for the later magic money tree, which duly blossomed in the madness of the pandemic; the always thin line that separates the legitimate pursuit of the inflation target from overt monetary financing of government deficits was deftly and massively breached.
As fast as governments could issue the debt needed to pay for the vast costs of closing their economies down, central banks stood by ready to buy it all up again in the markets. Since the central bank is in virtually all cases a wholly owned subsidiary of the sponsoring government, governments were effectively buying up their own debt. It was almost bound to be inflationary the moment demand came bouncing back from the deep sleep of lockdown, and so it has proved.
But it is not just the inflationary costs governments are now having to wrestle with. As it turns out, there is also a direct fiscal cost which only now is beginning to materialise.
This was partially foreseen, but not spelt out to the public at large. A conspiracy of silence operated around the likely sting in the tail.
In essence, QE is the financing of government bond purchases through the creation of short term central bank reserves. Investors swap their bonds for reserves. This works fine, and to the advantage of governments, as long as interest rates are falling, for what is basically happening is that expensive long term debt is being replaced with less costly short term debt.
The resulting profit from the interest rate differential would then be transferred from the central bank to the sponsoring government. A recent Bank of England paper estimated these transfers at £123bn since the start of QE in 2009.
Unfortunately, the tables are now reversed. With the return of inflation, the interest rate on reserves has risen above that of the average in the Bank's £847bn holding of government bonds. Having banked and spent the previous profits, governments are now being forced to finance the consequent losses. Already the costs are biting hard. Last month, the UK Government was forced to pay the Bank of England the thick end of £1bn to cover QE losses. The same Bank of England report anticipates total transfers this year of £30bn, and the same the year after.
Separate Office for Budget Responsibility (OBR) forecasts suggest the UK Treasury will need to pay the Bank of England £133bn over the next five to six years – or nearly as much as it costs to run the NHS for a year – more than wiping out the previous profits.
It is a similar picture, though on a much larger scale, at both the US Federal Reserve and the European Central Bank (ECB).
Britain is an outrider in recognising these costs. Eventually, the ECB will be forced to fess up too. Expect a furious row in the German Bundestag when it emerges that the ECB is in negative equity and that it will be Germany coughing up the lion's share of the money needed for recapitalisation.
It is tempting to dismiss all this as little more than accounting mumbo jumbo of no real world significance. Regrettably, this is not the case. These are real losses, or money which owing to the follies of QE the taxpayer is now being forced to pay to the commercial banking sector.
The Government could of course limit the transfers by coercing the central bank into paying less on reserves than Bank Rate, as suggested by Paul Tucker, a former deputy governor of the Bank of England, but this would seriously interfere with the transmission of monetary policy as well as risk a flight of capital out of UK reserves into alternative, overseas depositories that pay more.
But let's not despair. It is more than possible that things won't turn out to be quite as bad as either the OBR or the Bank of England forecasts suggest. Two members of the Bank's Monetary Policy Committee have already expressed incredulity at the future path of interest rates implied by markets and on which these forecasts of future QE losses are based.
If inflation and rates turn out to be lower than the markets expect, then the transfers too will be correspondingly reduced. Looking out ten years into the future, the Bank of England reckons the eventual tally could be anything between £50bn and £200bn, or in other words a wide range. All the same, it only goes to show that there is no mess quite so bad that official intervention won't make even worse.
In its latest forecasts, the OBR reckons that UK Government debt interest spending more than doubles in cash terms from £56.4 billion (2.4pc of GDP) last year to peak at £120.4 billion this year (4.8pc of GDP), the highest since immediately following the Second World War both as a share of GDP and as a share of revenue (12pc).
It then averages £93 billion (3.4pc of GDP) across the five years from 2023-24 to 2027- 28.
The upshot is that the debt interest burden over the next five years is projected to be almost twice as large as UK governments have become accustomed to over the past two decades.
Again, it may be that the OBR is overstating the destruction, but when MPs throw up their hands in horror at the ever expanding size of the state – total public spending is projected to rise from 39.3pc of GDP in 2019-20 to 43.4pc of GDP in 2027-28 – they should bear in mind that two thirds of this additional spending comes not from government overreach, but high debt interest payments, a totally wasteful transfer from taxpayers to bondholders that results directly from allowing inflation to get out of control. Much of this increase in debt interest, moreover, stems from the folly of QE.
Some comfort could possibly be drawn from recent International Monetary Fund projections for UK public indebtedness, which paint a much more flattering picture than that of the OBR. Indeed, on the IMF forecasts, the UK looks to be the star G7 performer, with net debt falling to 56.5pc of GDP in five years’ time, against France at 106.9pc. Stick that in your remoaner pipe and smoke it.
But would that it were so. As IMF insiders now sheepishly admit, their forecasts for the UK are a complete dog's dinner, partially based on some wholly delusional assumptions, including the King Canute-like fantasy that because the UK Government had set a target for debt to be falling in three years’ time, the policies to make this happen would miraculously come into being. The IMF's Article IV forecasts for the UK, expected in the New Year, will be much more in keeping with those of the OBR. Hey ho.
This article is an extract from The Telegraph’s Economic Intelligence newsletter. Sign up here to get exclusive insight from two of the UK’s leading economic commentators – Ambrose Evans-Pritchard and Jeremy Warner – delivered direct to your inbox every Tuesday.
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|To: DinoNavarre who wrote (9972)||12/1/2022 9:58:43 AM|
|From: Elroy Jetson|
|We can clearly see how stupid Emperor Xi has been refusing to use the best world-class vaccinations in China.|
China has developed their own mRNA vaccine, but it's only being used in Indonesia. - reuters.com You just can't make this shit up.
With prevalent effective vaccinations the very limited number of Covid deaths in the US now occurs almost exclusively among unvaccinated elderly people. A Darwinian culling of stupid older Republicans.
Most vaccinated Americans never know they have Covid, due to a lack of symptoms, unless they work in a healthcare or high security facility with frequent testing.
China has instead chosen ineffective vaccines coupled with continued frequent closures of their economy. Oh well the Chinese Communist Party claims they know best. LOL
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|To: elmatador who wrote (9970)||12/1/2022 1:00:42 PM|
|I actually disagree with this:|
"Inflation arrived with a roar in 2021"
The gubbiemint adjusts inflation stats as it sees fit to accomplish a narrative that, in the end, benefits Wall St.
Inflation has been far in excess of the mythical "2%" for a long time.