JP Morgan’s chief rates and currency strategist, John Normand, has today come out against the view that the record low interest rates globally are likely to lead to asset bubbles. From the AFR:
JP Morgan head of foreign exchange and international rates strategy John Normand says record low interest rates, including in Australia, are here to stay for at least another 12 to 24 months but this won’t inflate prices for property or shares.
“There is always the risk that if rates stay low for a long time you get asset price inflation,” he says.
“This is inflation that is definitely occurring – it is not the price inflation, it is not CPI, which is rising around the world – it is asset prices. The bubble, though, means that assets have risen to these extraordinary levels beyond what these assets are worth, but you are a long way from a bubble.”
Normand’s view contrasts with that of William White, former chief economist of the Bank for International Settlements (BIS), who over the weekend argued that credit excesses across the globe have reached or surpassed levels seen shortly before the Lehman crisis five years ago:
…a hunt for yield was luring investors en masse into high-risk instruments, “a phenomenon reminiscent of exuberance prior to the global financial crisis”…
“This looks like to me like 2007 all over again, but even worse,” said William White, the BIS’s former chief economist, famous for flagging the wild behaviour in the debt markets before the global storm hit in 2008.
All the previous imbalances are still there. Total public and private debt levels are 30pc higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle”…
Mr White said the world has become addicted to easy money, with rates falling ever lower with each cycle and each crisis. There is little ammunition left if the system buckles again. “I don’t know what they will do: Abenomics for the world I suppose, but this is the last refuge of the scoundrel,” he said.
Obviously, I agree with White’s view over Normand’s. It seems a stretch to argue that the ingredients that brought us the Global Financial Crisis (GFC) in the first place – i.e. easy credit, rising debt levels, and rising asset prices – are now benign. It’s not like the global imbalances that existed pre-GFC have been addressed. Rather, the world’s authorities have instead embarked on one giant “can kick” – pushing the problems down the road.
What is also forgotten in all this is that the world’s population is ageing fast. This means that any additional debt taken on now will need to be repaid from a declining base of workers. It also means that the global economy will find it increasingly difficult to grow and for national incomes to rise, again making the debt burden all the more troublesome.
While nobody knows how this grand experiment will work out, since we are in uncharted waters, it seems inevitable that the world will some day face a day of reckoning.
