The Economist - USA (2022-01-29)

10 Leaders TheEconomistJanuary29th 2022

A

fter theinterest­ratecutsandhecticcentral­bankbond­

buying of early 2020, investors came to believethatcentral­

bank stimulus would pretty much last for ever. Today,however,

as investors come to terms with the end of the eraoffreemoney,

financial  markets  are  in  spasms.  Markets  nowexpectinterest

rates to increase four times in 2022 as the Fed fightstheinflation

that has lifted growth in the consumer­price indexto7%,a level

barely imaginable a year ago. On January 26th theFedconfirmed

that  it  would  end  its  bond­buying  programme (seeFreeex­

change) and signalled that it would probably raiseratessoon.

This  hawkish  shift  is  the  most  important  amongmanyto

have taken place in the world’s central banks in recentmonths.

But  it  has  only  recently  begun  to  bite  in  assetmarkets.After

reaching a vertiginous high of nearly 40 times

earnings at the turn of the year, the s&p 500 in­

dex of stocks has fallen by 9% in January (mar­

kets in Europe and Asia have fallen too, though

by  less).  Markets’  intraday  volatility  has  been

just  as  striking  (see  Finance  &  economics  sec­

tion), reflecting investors’ struggle to digest the

consequences of tighter money.

One is the repricing of long­dated assets. As

interest rates collapsed during the pandemic, the value of secu­

rities with pay­offs stretching far into the future soared. Shares

of technology firms like Zoom and Netflix, already sent higher

by  the  switch  to  remote  work  and  at­home  entertainment,

looked even more desirable as the return on bonds all but van­

ished.  Their  rise  propelled  the  American  stockmarket.  Lately,

however, long­term real interest rates have surged in anticipa­

tion of monetary tightening, causing a reversal of fortune. The

turnaround  has  been  dramatic  for  the  most  speculative  stocks

and novel instruments such as cryptocurrencies.

The effect of higher rates on the real economy is slower­burn­

ing and harder to anticipate. Ultra­cheap money let companies

raise vast amounts of capital in 2021, a boom that will not be re­

peated.Homebuyershaveassumedbigmortgagesashousepric­

eshavesoared.Distressedfirmshavetakenadvantageofgovern­

ment­backedloans.Governmentdebt­to­gdpratioshavebal­

looned,becauseoflarge,sustaineddeficitsintherichworldand

a collapseingrowthinmanyemergingeconomies.

Highindebtednessmakestheworldeconomymoresensitive

tochangesinmonetarypolicy.Centralbanksmustraiserates

enoughtoquellinflationbutnotsomuchthattheytipecono­

miesintorecessionasinterestburdensrise.Householdshave

strongerbalance­sheetsthanyoumightexpectgiventhedepth

oftherecentrecession,buttheirhealthdependsinpartonasset

pricesstayinghigh.AndiftightermoneyattheFedcausestur­

moilinemergingmarkets,theconsequencescouldreboundon

America’seconomy.

Astheyaimfora narrowlandingstrip,cen­

tralbanksalsofacehighwinds,becauseofthe

riskofwarinUkraineanduncertaintiesassoci­

atedwiththepandemic.Economistsarestrug­

glingtoforecasthowmanypeoplewholeftthe

workforcein 2020 willeventuallyreturn—and

themorethatdo,thelessthechancethata da­

maging wage­price spiral will take hold. 

They  are  also  grappling  with  doubts  over  when  consumers

will  shift  their  spending  back  to  services,  easing  the  upward

pressure  on  goods  prices  caused  by  bunged­up  supply  chains.

Economic  data  have  become  harder  to  interpret.  If  retail  sales

fall, for example, does it reflect economic weakening, or a wel­

come return to normal patterns of consumption?

The uncertainty about the global economy’s strength and its

ability to withstand higher rates, combined with central banks’

twitchy trigger­fingers as they worry about inflation, means that

markets are entering a new phase. During much of the pandem­

ic, cheap money drove asset prices to astonishing highs even as

the  world  economywas  in  the  dumps.  Today  they  are  tightly

bound to its fate.n

The era of free money is coming toanend.Thatmeansfinancialvolatilityandeconomicuncertainty

NASDAQ composite index

July 1st 221=1

110

100

90

2021 2022

A turning point

Financial markets

I

n the decade when its generals allowed it some semblance of

democracy, Myanmar flourished. The government brokered a

landmark  ceasefire  agreement  with  half  of  the  country’s  many

rebel groups. Poverty rates plummeted and foreign investment

surged.  The  economy  grew  annually  by  an  average  of  6.6%.  A

middle class emerged. 

In just one short year, the generals have undone the gains of

the past decade (see Asia section). Employment has fallen. Dol­

lar­a­day poverty has more than doubled, engulfing nearly half

the population. In cities it has tripled. The currency has plunged

by  60%  in  the  past  five  months.  The  economy  is  30%  smaller

than was forecast before the coup and the pandemic. Electricity

blackouts are widespread. Schools are, in effect, shut.

Foreign investors are heading for the exit, too. TotalEnergies,

a  French  energy  giant  that  had  few  qualms  about  dealing  with

previous  juntas,  announced  its  departure  in  January.  Chevron,

an American oil major, and this week Woodside Petroleum, from

Australia, have followed suit. Adani Ports, part of a huge Indian

firm,  is  shipping  out.  Ant  Group,  a  Chinese  company,  recently

pulled out of a deal to buy a stake in a local fintech company. 

Worse  still,  the  army  is  using  force  to  suppress  widespread

resistance to its rule. General Min Aung Hlaing, the head of the

One year on from the coup, the country is at risk of being forgotten

Out of mind

Myanmar