The biggest economic threat today is not the interest rate, nor the exchange rates, nor the possible trade war fuelled by Trump: it’s the debt accumulated by countries across the world. This has increased 12% of GDP since the crisis, totalling 225% of global GDP. Starting with China, followed by Europe and ending up with the US, the threat from the current and future debt is terrifying.
We need to be aware of the existence of regulations over and above the well-known Taylor Law, starting with this regulation adjusted to establishing a downward limit on rates of 0%, which is very important in the US Fed’s case.
There’s an idea circulating amongst the central banks or, more accurately, amongst pressure groups in the central banks. The crux of this idea is: “the central banks should normalise interest rates”.
As long as there is no perfect equivalence between supply and demand, inflation will form part of our system, according to Robeco.
Pablo García Gómez (Carax Alphavalue) |Sector earnings from Europe for the second half of 2017 have been overall solid, with some positive surprises from “heavy cyclicals” like oil and metals and mining.
Kommer van Trigt (Robeco) | The markets are discounting that in the next few months there will be more certainty surrounding the central banks’ normalisation strategy. In its quarterly outlook, Robeco’s Global Fixed Income Macro team says it makes sense for the central banks to begin to normalise their policies.
The Fed signed five major swap arrangements with allied central banks that totaled more than $580 billion in 2008, whereas the People’s Bank of China signed more than 30 bilateral currency swap agreements valued at $490 billion in year 2017.
Despite quantitative easing and 3 years of more synchronised developed economy growth, it is not clear that inflation has really got any traction. Technology, globalisation, unemployment and changes in working practices have all contributed to the lack of inflationary pressures and still do.
There’s a new monetary theory doing the rounds here which claims to be revolutionary: the Modern Monetary Theory (MMT. Not to be confused with the Market Monetary Theory). I agree with some of its points. But when some of its supporters say the state deficit and debt are not important – that they don’t have damaging consequences – the theory becomes a huge deliberate fallacy.
I believe central banks don’t control long-term rates – which are decisive for investment – and that they can influence them in what we would call normal circumstances, namely when GDP is expanding and inflation is at its optimum level. The central bank trys to control the private market’s expectations, but it doesn’t always succeed.