THE time has come to hike interest rates aggressively because that is the only way the global economy will avoid a cataclysm way worse than it suffered in 2001 or 2008.
THE time has come to hike interest rates aggressively because that is the only way the global economy will avoid a cataclysm way worse than it suffered in 2001 or 2008.
It would not be a popular move, at least among the class of people making a mint out of artificially depressed interest rates. Borrow low and invest high has been a killer strategy for the past seven years for those rich enough to rake in the spoils.
But for the rest of us? It has been miserable. The never-never land of paper wealth we have earned (in the form of deferred pension income or savings) has been wiped out by the real cost of living. Salaries have not kept pace with inflation, bonuses are nonexistent, leaving most working stiffs worse off than they were when the recession struck seven years ago.
The roots of this malaise wander deep into the past. Remember the term "green shoots"? Famously blethered by Federal Reserve chairman Allan Greenspan in the miserable months after September 11 2001, the words grew new legs under his successor, Ben Bernanke, when the credit bubble popped in late 2007.
Critics derided the very notion of green shoots - informedtrades.com said that, instead of seeds, all they saw were piles of manure. Both busts goosed growth of a more damaging sort.
Loose monetary policy was intended to stimulate the borrow-and-spend dynamics that fell fallow when the world lapsed into post-bubble recession. However, instead of being fed into productive enterprises, cheaply borrowed cash gushed into speculative trades. When stock prices boom, it stokes the illusion that everything is dandy. Yet it is just paper wealth, and only a privileged few feast on the cream.
No wonder there is such pessimism in the world right now. John Hussman, despite being deep in the machine as an asset manager, foresees nothing but ruin if the planet's collective monetary-policy regime does not wake up.
"Bernanke's proposed 'wealth effect' from [rising] stock prices was a canard from the instant it left his lips," rages Hussman in this week's note to investors.
"Milton Friedman won a Nobel prize in part by demonstrating that individuals consume off of what they conceive as their 'permanent income', not based on fluctuations in volatile securities."
Do not think the fury concerns only economies to the north of South Africa. We are all in the midst of an asset bubble, and the only winners are the international rich - leveraging cheap money into fat gains with every tick upwards in the JSE. The middle and working classes will never get a sniff of the spoils. No "trickle-down" benefit will ever reach the unemployed.
So jack up interest rates, right now - higher than the inflation rate, thunders Hussman. First to win will be retired people who rely on yield income. Higher real interest rates will also signal expected economic growth and so divert hot money away from speculative markets into diverse smaller businesses with high expected rates of return.
Yeah! If only it was as easy as that.