The author, Morgan Stanley Investment Management’s chief strategist global, is the author of ‘The Ten Rules of Successful Nations’.
One of the great mysteries of the global economy is the reason why, although rising inflation is gaining momentum, long-term interest rates have not plummeted in recent months.
So far, experts have described this volatile market as a sign of the epidemic, for fear of further collapse, or for the purchase of large quantities of central banks, or – above all – the belief that inflation is temporary.
There is no such explanation that works well based on recent developments, but there is an explanation that does this: the world is in a debt trap.
Over the past 40 years, total debt has more than tripled to 350 percent of global debt. With the central bank lowering interest rates to their recent decline, simple cash flows in stocks, bonds and other securities helped to boost global market growth from a four-fold increase in global GDP to fourfold. Now the bond market sees that the debt that is rife with the global economy is so critical to inflation that any increase is impossible.
Of course, if all the established explanations fall then something deeper has to happen. Despite the growing popularity of Covid, fears of economic instability have led to speculation that new vaccines and treatments have turned Covid into a normal part of life, like the common cold. Global news shows consumers are returning to buy and heading to restaurants near the epidemic before.
At the time of the crisis, the US Federal Reserve was buying 41 per cent of new Treasury stocks, but long-term yields were about to decline even though the Fed and other central banks began. mark in early autumn their intentions to end their purchases. In addition, central banks are buying permanent bonds, so why are prices rising on short-term bonds?
This is where the rise in inflation comes – perhaps the same rise in the slow decline of the epidemic, or the fact that the country is entering a period such as the 1970s, inflation is firmly rooted in the order and thinking of the people.
Evidence is mounting that rising inflation is not as “transient” as central banks have been forcing it. The focus is on the rise in commodity prices, which took place over 13 percent from more than 6 percent in the US last month. But the starting point for inflation – which does not include fixed prices such as food and energy, and a clear indication of what is happening over the long term – has risen worldwide and is now at over 4 percent in the US. Wages are also subject to long-term rising pressure: now there are more than six opportunities for every unemployed American, up to 12 years.
Earlier this year, there was reason to expect that crop yields could endure, halting rising prices for a long time, but it ended. Studies show that people who work from home lose a lot of time to do the same.
Global markets are starting to fall in price in anticipation of rising prices and growth that will force central banks to raise short-term prices, starting next year. Instead, short-term inflation puts global markets at risk of their worst year since 1949.
However, yields for 10-year government bonds have now dropped sharply from inflation in all developed countries. The market shows that, no matter what may happen soon in terms of inflation and growth, over time interest rates will not rise because the country is heavily in debt.
As the financial markets and debt both grow as part of GDP, they become less stable. Prices and lending rates are rising sharply with inflation, and they now represent a significant risk to the global economy. In the pre-emptive years, central banks often increase prices by 400 to 700 bases.
Now, a slight setback could lead many countries into economic crisis. The number of countries with total debt exceeding 300 percent of GDP has risen over the past two decades from half of twelve to twelve, including the US. Rising interest rates could also reduce inflation, which is often economically low. These threats may explain why the market seems to be focusing too much on “mental deficits”, in which central banks are forced to raise prices sharply, disrupt the economy and repurchase prices.
On the contrary, the world is embroiled in a debt crisis, which suggests that even the sharp rise in inflation is new and unpredictable, and may even be justified.
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