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The Business: The Magic Departs From The Markets.

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'The magic departs from the markets':


The problem for the global economy is that cheap money allowed non-financial companies to transform their balance sheets but triggered an ultimately unsustainable explosion in consumer and mortgage debt. Other companies -- especially private equity firms -- also went on a borrowing binge. This infusion of liquidity and credit was always going to trigger either asset price bubbles or higher consumer price inflation -- or a combination of both; the only question was timing. Equally, it was always clear that the punchbowl would have to be withdrawn when inflationary pressures became too great; the strategy as envisaged by the former Federal Reserve chairman, Alan Greenspan, the Japanese authorities and many other central banks was to remove the stimulus extremely gradually to ensure nobody noticed and the global economy would wake up one day entirely weaned to its addiction to cheap credit and with everything back to normal. Needless to say, this didn't work out as planned, as witnessed by last week's extraordinary gyrations. Part of the problem was the changeover at the Fed to Ben Bernanke.

The ending of the low-rate punchbowl signals the end of the international property boom, which has helped boost household's balance sheets and spending in numerous countries from Spain to Australia. It also means that it is becoming more expensive for companies to borrow -- and more expensive for private equity companies to leverage up and buy public companies. Worst of all, it could trigger a massive debt crisis for consumers and companies that have borrowed at floating interest rates -- and that includes many British homeowners, many of whom are already stretched to the limit with mortgage payments.


The British economy will find it especially difficult to adjust to the era of tighter money: while interest rates already seem high at 4.5%, liquidity remains plentiful. Provisional money supply numbers for April from the Bank of England last Friday showed a further surge in broad money growth, up 1.3% in the month to a 12-monthly rate of 13.1%. This is the fastest annual rate of broad money growth since November 1990, according to Lombard Street Research. This matters: in a remarkable development, the Bank of England is now starting to pay attention to the money supply again, after bitterly rejecting its usefulness during the 1980s. This month's inflation report contained an extended discussion of the relationship between excessive growth of money and inflation; the Bank admitted that there may in fact be a link and that the rate of money supply growth was both too fast for comfort and higher than its equilibrium rate. David Walton, a member of the Bank's Monetary Policy Committee, last week also gave a speech explaining that one reason he supports a rate hike is that rapid money growth shows policy remains accommodative. All of this suggests that British interest rates will definitely increase, despite modest rates of growth over the past 18 months or so.

Edited by Jeff Ross

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  • 337 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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