Central bankers can’t save us from the current stock market crash – because they caused it.
The global bond market collapsed again yesterday and stocks may soon follow, and this time there is nothing global monetary authorities can do to stop it.
Central bankers like the Bank of England and the US Federal Reserve cannot run to the rescue because they are the ones responsible for the terrible mess we find ourselves in. Now it seems we are finally ready to foot the bill for two decades. of ultra-loose monetary policy, and it will be massive.
Most people don’t understand how the global bond market works, yet it is larger and more important than the stock market.
Governments and companies issue bonds to finance their spending, and these are traded on the bond market. At last count, it stood at $126.9 trillion, slightly more than the global stock market.
However, private investors pay little attention to this, because normally all the action takes place on the stock market.
As I explained recently, This is not a normal time for the bond market, and thanks to central bank tinkering, it’s going to get even crazier.
Since the Internet crash in 2000, the Bank of England, the Federal Reserve, the European Central Bank and others have cut interest rates every time the economy faltered or stock markets collapsed.
After the 2009 financial crisis, they cut rates almost to zero and launched a new policy known as quantitative easing, or QE.
This involved flooding the market with bonds to drive down interest rates. Central bankers then bought back these same bonds, paid for with virtual money.
The BoE alone bought £895 billion worth of bonds:
but that’s a pittance compared to the $6 trillion the Fed spent.
When Covid hit, central bankers flooded the market with even more newly created money. President Joe Biden is now injecting another $1 trillion into the U.S. economy under his strangely named Inflation Reduction Act, aimed at boosting clean energy.
All these stimulus measures have triggered the current inflationary storm and forced central bankers to reverse course. They are now tightening their monetary policy instead of easing it and that will hurt.
Central bankers brought this problem on their own heads (and ours) (Image: Getty)
As mortgage borrowers know to their cost, the BoE and Fed have raised interest rates time and time again.
They also began unwinding QE by selling bonds rather than buying them, a process known as quantitative tightening, or QT. There is a problem.
The market is now flooded with bonds. Supply exceeds demand and buyers demand higher interest rates as a result.
Yields on 10-year U.S. government bonds, known as Treasuries, have now climbed to 4.80%, the highest rate in 16 years. Two-year Treasuries now yield more than five percent, while bond yields soar, prices collapse.
This is also bad news for the stock markets. Why get into stocks when you can get five or six percent a year in bonds, without putting your capital at risk?
Needless to say, higher rates are also bad news for borrowers.
Central bankers have kept interest rates too low for too long, and as a result, they will now keep them high for too long.
The U.S. economy is still booming, as confirmed by yesterday’s figures, which showed 336,000 new jobs were created in September, well above the 170,000 estimated, according to the U.S. Bureau of Labor Statistics. United.
This will cause wages to rise even further in the United States, further fueling inflation. The Fed will therefore have to raise rates by up to seven percent, thereby increasing pressure on the stock market.
Analysts now say the stock market will have to collapse in order to make stocks cheap enough for investors to buy back.
It may have already started, with Wall Street falling 6% in September.
A stock market collapse will be a disaster for existing pension and stock Isa holders, who will see the value of their holdings fall.
Worse still, there is little chance of a rapid recovery, as interest rates could remain high until 2024.
Higher bond yields will also increase the risk of recession, as additional borrowing costs weigh on the economy.
The central bankers are totally powerless. They created this problem by reducing interest and now have no choice but to increase it despite the collateral damage.