As the world emerges from its zero interest-rate-induced coma, few people have yet processed quite how weird monetary policy became, how long it lasted and how distorting its effects were. Fewer still have grasped the full implications of the coming shakeout.
Ultra low borrowing costs caused “things to be built that otherwise wouldn’t have been built, investments to be made that otherwise wouldn’t have been made, and risks to be borne that otherwise wouldn’t have been accepted”, writes Marks.
It also clouded our mental faculties. Remember Modern Monetary Theory? Apparently intelligent people were genuinely arguing that countries with control of their currencies could disregard their deficits and national debt. We don’t hear so much from those guys these days.
But really, their ideas were just an extreme manifestation of the prevailing attitudes. Various UK chancellors have created 26 different fiscal rules since Gordon Brown first introduced such constraints on tax and spending decisions in 1997. And, by the Institute of Government’s count, 15 of them were broken.
Chancellors of all stripes could get away with this because, in essence, investors didn’t care. Slavering bond vigilantes were brought to heel by a global yield famine; just six years ago they were queuing up to buy a century-bond issued by serial defaulter Argentina.
The easy money years were characterised by rapid growth, lax financial management, low levels of risk aversion and a “dearth of prudence”. The global bond market rout of recent weeks suggests this is all in the process of being flipped on its head.
Interest rates aren’t likely to bounce all the way back up to where they were in the 1980s. But, having finally tightened monetary policy, central banks will be extremely reluctant to loosen it again anytime soon. And the price of credit doesn’t have to rise an enormous amount to create massive problems.
Marks gives the example of a notional investor who five years ago could have gone to the bank and got a $800m loan at 5pc. Now, it needs to be refinanced but they can only get $500m at 8pc. “That means the investor’s cost of capital is up, his net return on the investment is down (or negative), and he has a $300m hole to fill.”
