Rising interest rates, winding back central bank bond buying and reducing fiscal stimulus amounts to a triple tightening of financial conditions that threatens to weigh on the real economy.
Financial policy interventions have loomed large over the past decade. The ultimate intended target of these interventions is the “real economy”, that is, individuals and households who live on “Main St.
” Policy aims to boost their employment, their cashflows and their “animal spirits.”of financial policy, fiscal policy, impacts the economy via boosting or curtailing government spending. Fiscal stimulus has a direct route to “Main Street.” Theof financial policy, monetary policy, has more variable paths to households. In order to make it all the way to Main Street, monetary policy often has to take a detour through Wall Street, via the institutions and assets of the financial economy.Allie Joseph Conventional monetary policy - the raising and lowering of interest rates - tightens or loosens financial conditions via banks’ willingness to lend. Unconventional monetary policy such as quantitative easing was expressly designed to reduce the returns on longer dated “safe” assets, forcing investors into “” scenario. Even the most risk-averse of investors have been pushed to buy riskier and riskier assets. Government responses to COVID-19 triggered one of the greatest deployments of financial policy interventions in the history of the world. With hindsight, it’s now obvious that much of the monetary liquidity intended for Main Street actually got stuck on Wall Street. And, in a curious twist, much of the unconventional fiscal policy that went direct to Main Street was promptly recycled back to the financial economy in the form of. The financial economy saw rising values in almost every major asset class. Wall Street was the big pandemic winner. Now, the wheel is turning. The big tap in the sky is being turned off, in a triple tightening of conventional monetary, unconventional monetary and unconventional fiscal measures. This, combined with a strong lift in inflation has set the . Other asset classes have not been immune, with equities and crypto values all taking a serious hit.So far, the pain is mostly being felt on Wall Street and in the financial economy. If it’s only institutions and asset values that are taken ill, we might have seen the worst of the infection and valuations might stabilise. But will it be that simple? What turns a correction into a full-blown bear market is the real economy rolling over. This lowers company earnings, justifying a further double-whammy that hits earnings per share and price to earnings ratios, popular valuation measures, In the dot com crash, the vector from deflating valuations on Wall Street to pain on Main Street was unemployment, with over 2.2 million jobs lost in 2001-02. In the financial crisis of 2008, the infection carrier was the housing market. The funding squeeze precipitated by the collapse of Lehman Brothers tightened bank lending, prompting mortgage defaults and house price falls. Housing is the largest asset of households in the real economy, so this triggered a significant negative wealth effect as mortgages no longer had headroom which could be drawn down. Which brings us to today. Will the outbreak on Wall Street become an epidemic for Main Street? So far, there’s been pain in meme stocks, and pain in crypto. Between late 2020 and early 2022 retail investors had put over $US1 trillion into global stock markets, with their margin loan balances and average entry prices steadily rising along with markets. US stock markets have now fallen through the aggregate average entry price, suggesting losses may start to build. Similarly, the collapse of the Terra crypto complex has wiped-out over $US55 billion of capital; Lehman Brothers at its peak in 2007 was “only” $US46 billion of market capitalisation. These losses are significant and could lead US households to spread the pain. In order to manage their own losses, they may cut back on spending, leading to job cuts and economic weakness. Think of this as the economic equivalent of a sneeze. Or perhaps ownership of crypto and stocks is not as widespread as home ownership, and the infection remains relatively contained: economic self-isolation. The other significant risk factor is inflationary pressures. So far, households are still buoyed by pandemic stimulus and low unemployment, but these buffers will be eroded if cost-of-living pressures persist. Fortunately, we have all become experts in monitoring infection rates. Watching for signs of contagion from Wall Street to Main Street should be second nature to us by now. Let’s hope we don’t end up with the current “lockdown measures” in the financial economy extending into the real economy.
Australia Latest News, Australia Headlines
Similar News:You can also read news stories similar to this one that we have collected from other news sources.
Melbourne looks to the world to reimagine city’s street styleFrom tram stops to water fountains, the design on our streets defines our culture. Should we welcome skateboarders and homeless people? Should we sit down at tram stops? Now we can all have a say. melbourne
Read more »
‘Please tell me that is not your penis!’ New Zealand’s Shortland Street in 14 key momentsCountry’s longest-running soap opera marks 30 years on air this week. Here we celebrate some of its most infamous scenes
Read more »
Iran seizes two Greek tankers amid rising tensions in the GulfIRGC forces swoop on ships in what appeared to be a reprisal for Greece’s role in earlier seizure of Iranian oil tanker
Read more »
Street brawl ends in tragedy in Adelaide CBD as man dies after being arrestedPolice are investigating a death in custody after a fight involving a teenage boy and a man in the Adelaide CBD. 7NEWS
Read more »
Crash ends qualifying early as Daniel Ricciardo only manages 14th fastestAustralia's Daniel Ricciardo was knocked out in Q2 after two poor flying laps around the narrow streets of Monte Carlo.
Read more »