Once again, we are seeing the unwisdom of loose monetary policy.
Central bankers tend to view quantitative easing as a monetary operation. But from a financial perspective it involves swapping fixed-rate for floating-rate debt. According to a House of Lords report published last year, the BoE’s securities purchases reduced the effective average maturity profile of UK government debt from nearly 15 years in 2007 to just over 10 years.
Taking interest rates to zero or below has painted the world's central banks into a corner, where any attempt to undo the rate cuts causes a liquidity crisis and a market meltdown. With lower interest rates come shorter maturities—and thus increased sensitivity and exposure to interest rate changes.
Now the central banks are faced with the need to tighten monetary policy and raise interest rates—after years of making markets hypersensitive to that very thing.
There is no soft landing to be had, not in the UK nor anywhere else.
They're faced with a Sorcerer's Apprentice situation. The brooms won't be stopped easily. The difference, of course, is there's no magic and no wizard to save the day. I remember commentators warning about this many times since ~2008. They were ignored at the policy level.
2008 was the main inflection point. Because of the growth of derivatives as an investment strategy, and the rising popularity of securitization, between about 2003 and 2008 there was a growing dichotomy between the dynamics of Wall Street and those of Main Street.
At this point markets are almost wholly disconnected from the Main Street economy, except for the reality of Main Street paying for the repeated bailouts of the gamblers who bet wrong.
"Taking interest rates to zero or below has painted the world's central banks into a corner"
Some of us recognized that more than ten years ago. Personally, I never thought that they could survive in that corner for anywhere near this long.
A great many of us recognized that when they first started these easy money policies.
The challenge has always been how to navigate once in the ZIRP/NIRP swamp. At this point every turn crashes the Fed on one rock or another.
TANSTAAFL is still the best economic policy around. Damn shame the geniuses at the Fed forgot that.
TANSTAAFL evokes memory of the late Robert Heinlein's "The Moon Is a Harsh Mistress".
I never understood how "negative interest rates" could work even if every single one of us were billionaires!
I am about to head out the door to go by the liquor store and the grocery store which will certainly remind me I'm not (a billionaire).
They're faced with a Sorcerer's Apprentice situation. The brooms won't be stopped easily. The difference, of course, is there's no magic and no wizard to save the day. I remember commentators warning about this many times since ~2008. They were ignored at the policy level.
2008 was the main inflection point. Because of the growth of derivatives as an investment strategy, and the rising popularity of securitization, between about 2003 and 2008 there was a growing dichotomy between the dynamics of Wall Street and those of Main Street.
At this point markets are almost wholly disconnected from the Main Street economy, except for the reality of Main Street paying for the repeated bailouts of the gamblers who bet wrong.