Interest rates keep increasing, inflation keeps rising. The monetary policies of the last decade and a half are now being revealed for the experiments they truly were. As baseball legend, Yogi Berra, a man famous for colloquial expressions lacking in absolute logic yet simultaneously carrying more than a grain of truth, didn’t say but might well have done, ‘nothing is as expensive as cheap money’.
The problem with an extended period of money being priced far below its real economic cost is that it distorts asset prices and positively encourages marginal economic activity. Or, to borrow a description from the higher echelons of economics, cheap money leads to bad stuff and once asset prices have been sprinkled with such largesse, the adjustment process will be more than painful. This is especially so when said adjustment process can no longer be contained by central banks who, for far too long, believed their own hype.
Stock markets, mortgage rates and bond yields are now adjusting to a different kind of ‘normal’. One that doesn’t look too familiar to those the right side of middle age but to those of us who, once upon a time, considered ourselves fortunate if their mortgage rate fell into single figures, it’s a touch more recognisable.
