Cheap money becomes very expensive in the long run. In my new book, “Escape from the Central Bank Trap” (Business Expert Press), I explain that central banks are using the same inflationary policies that led us to the financial crisis. However, this time, these policies put us at an even greater risk. The monster bubble created in the bond market will not be easily digested by the global economy.
Central banks face the backlash of stimulus with no real weapons to combat the next crisis, only the tools that they have always used. Interest rates are at all-time lows and money supply has ballooned to unsustainable levels. With central banks’ balance sheets close to 25% of GDP of the main economies, escaping the central bank trap will not be easy.
It will not be easy for governments to insulate the economy, when public debt has risen to unforeseen levels and deficit spending has not delivered the expected growth or inflation. In fact, very few governments globally would be able to survive a small rise of one percent in cost of debt.
It will not be easy for corporations either. Cheap money has perpetuated overcapacity all over the world and the imbalances are enormous. Interestingly, rating agencies note that while corporate debt has risen due to low interest rates and high liquidity, debt repayment capacity has shrunk. When so-called “high yield” bonds are now at 35 year-lows in terms of coupon, we are very close to one of the most dangerous bubbles seen in history. Because the solutions will not come from the traditional Keynesian solutions, inflate, pretend and extend.
At the level of households, this bubble poses great risks as well. Credit card debt and delinquencies are rising, and student loans are reaching a breaking point. The situation is made worse by the fact that disposable income has been wiped out due to tax increases. While cheap money flooded the market, the middle class was attacked through financial repression and tax burden at all-time highs in the OECD.
Central planners designed a way out of the crisis that would bail out governments, banks, and indebted sectors at the expense of the middle class. And in doing so, the plan failed, because economic growth based on debt simply creates further risk.
The artificial creation of money—without backing from savings and real output—is always at the center of all financial crises, and the next one will not be different. Creating fake money and artificially low rates not only dilutes real growth but impairs economic potential.
My book is not only a diagnosis of the problem; it is a book about solutions, and looks at the U.S. and the EU as well as the rest of the OECD.
In the book, I propose real ways in which governments can solve the current problem of low growth and weak productivity. The book outlines the real incentives that could be used to boost disposable income, rebuild the middle class, and improve real productive investments instead of perverse incentives that build white elephants and increase interventionism.
I decided to write, “Escape from the Central Bank Trap” because I believed it was urgent to recover the policies that have worked more effectively. I also needed to warn my readers about the extreme negative effects of moving further into real negative rates and the destruction of wealth via financial repression.
Recovering a policy of sound money and strengthening high-productivity sectors is essential, and it needs to start in the U.S. The rest of the world will follow, because the strategy works.
There is no need to seek weaker levels of growth by destroying the wealth of savers. This book aims to provide credible and effective solutions, as well as ideas for investors, analysing phenomena like crypto-currencies, debunking the Modern Monetary Theory, and proposing the Taylor rule law that could help central banks avoid falling into their own liquidity trap.
I hope you enjoy the book and that, at minimum, it helps to start a discussion with policymakers and provides the average citizen with enough ammunition to counterattack the fake messages of those that defend magic solutions that never work.
We can escape the central bank trap.