The end of the party
The era of easy money is over – and it’s no bad thing
LIAM HALLIGANBut now, if average workers are final-
ly being paid more, there’s the prospect of
inflation rising, and higher interest rates to
counter it. That pushes up bond yields, which
makes equities less attractive while raising
general borrowing costs. After a decade of
ultra-cheap money, this comes as a shock.
The reality is, though, that ultra-loose mone-
tary policy has long been counterproductive,
and should have been done away with years
ago. What is a shock for the markets is over-
due good news for the rest of the economy.
After the Lehman crisis, low rates and
quantitative easing were need-
ed. Had the world’s leading
central banks not provided
emergency liquidity back in
2008, the global economy would
have faced meltdown. Payment
systems would have failed,
sparking panic, economic torpor
and civil unrest. But what start-
ed as a short-term emergency
painkiller then morphed into a
prolonged monetary coma.
When the US Federal
Reserve began QE in Novem-
ber 2008, it was billed as a $
billion programme. The Bank
of England, five months later,
announced £50 billion of QE.
Eurozone policy bosses, mean-
while, dismissing the sub-prime
crisis as ‘an Anglo-Saxon prob-
lem’, declared the European
Central Bank (ECB) wouldn’t
use expansionary monetary
policy in response to ‘America’s credit
crunch’. Then, restraint vanished and the
western world’s virtual printing presses have
been on overdrive. The Fed implemented six
times more QE than envisaged; in the UK it
was nine times. The ECB, having shrouded
its early QE in technicalities to avoid wor-
rying German voters, has caught up fast. A
temporary medicine became, for powerful
politicians and financiers, a lifestyle choice.
Ordinary savers have been hammered.
With interest rates below inflation, real
returns have been negative, with those put-
ting money aside seriously losing out. Rock-
bottom annuity rates resulting from the
impact of QE have similarly condemned
countless retirees to lower pension incomesS
ince the crash ten years ago, stock mar-
kets the world over have been stead-
ily recovering. The Dow Jones, a bell-
wether index, has enjoyed double-dig-
it growth in five of the past ten years and
soared by 25 per cent last year — credit for
which, inevitably, has been claimed by Don-
ald Trump. ‘The reason our stock market is
so successful is because of me,’ he said on
board Air Force One a few weeks ago. ‘I’ve
always been great with money.’
We should not expect him to repeat this
point any time soon. Earlier this week, the
Dow suffered its worst fall in
six years, losing 4.6 per cent in a
single day and triggering a sell-
off around the world. It went
on to recover, but the loss — it
was down by 1,175 points at one
point, the largest drop in its his-
tory — was a lesson for every-
one. Something fairly important
has changed: the days of sure-
fire gains are probably over. The
benign financial environment of
recent years has gone. The VIX
index, a measure of market vol-
atility, on Monday registered its
biggest daily spike on record.
There have been periods during
this sell-off when shares, gov-
ernment bonds and gold have
dropped simultaneously, signi-
fying indiscriminate, across-the-
board liquidation.
But this was not really a crash:
markets worldwide are still far
higher than they were two months ago. The
dip on Tuesday was as nothing compared
with Black Monday in 1987, when the Dow
lost a quarter of its value in a few days. And
the market is not a barometer of the econ-
omy. There was no banking collapse, no
terrorist-driven panic, no geopolitical disas-
ter. This was a good old-fashioned market-
driven change in valuations, after a bull run.
In fact, it may well be that the world econo-
my is finally moving on from the 2008 crisis,
escaping the doldrums of its long aftermath.
Crucially, last week’s sell-off was sparked
by good economic news. It emerged that
wages for the average American worker had
grown by 2.9 per cent during the year to Jan-
uary — the fastest rate since the recession.It seemed to fit a trend: American unem-
ployment rates were even lower than those
of Britain, and when workers are harder to
find, they have bargaining power. Striking-
ly, the strongest wage growth was enjoyed
by less-educated workers. As the Cleveland
Federal Bank put it, companies are having
to do more to attract such workers, ‘raising
wages and creating career paths’.
This is a reversal of the trend in recent
years. It was a sign — no more than that —
of blue-collar workers asserting themselves.
And a hope that after a 17-year low, the ben-efits of rising labour demand were making
their way into workers’ pockets.
The American economy matters here
because markets around the world take
their lead from the US. Global stock prices
have long relied on a core assumption: that
US inflation will remain low. That, in turn,
allows the Federal Reserve to keep interest
rates low. The challenge now is for central
bankers to tiptoe back to normality, rais-
ing interest rates without spooking markets.
Janet Yellen, the outgoing Fed boss, has
handled this deftly, raising rates in five baby
steps from 0.25 per cent to 1.5 per cent —
without sparking a crash. Handing over to
Trump-appointee Jay Powell, Yellen left the
markets expecting another rise next month.