Global rates have been torn away from the fundamentals of economics and productive investment. Now is the time to put them back.
Before that, and for more than a decade, there was a collective belief that somehow zero rates and printing gargantuan piles of central bank cash was harmless enough and good for markets.
An extraordinary feature of the attached chart is that from 1997, right until the COVID-19 pandemic, actual inflation and long-run expected inflation were fairly stable and broadly in line with the Fed’s 2 per cent target. This was so for almost a quarter of a century. China simply cannot bring itself to be part of the rules-based economic order if those rules are not set by China itself.In the second Clinton presidential term the real 10-year rate was around 3.5 per cent. This reflected a strong return on capital as the benefits of businesses investing in computing technology and the internet in earlier decades led to a productivity boom without any upward trend in inflation.“New economy” exuberance went too far. Tech lost its leadership role.
Low interest rates and policies to push housing from 2004 are a good example. Housing was never going to be a productivity driver in filling the gap after the tech bust, and housing-related financial engineering was at the heart of the 2008 crisis.The big tech giants such as Google, Amazon, Apple, and Meta had also become dominant by 2004.
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