It’s safe to say that as this is written at noon EST on Monday the 24th, every economic policymaker in this hemisphere (and a lot of sleepless folks elsewhere) are staring at screens and wondering if this is it. They’ve been playing with fire for such a long time, trying to balance incompatible goals of low interest rates, stable currencies and accelerating growth, that for a while they almost believed that they would get away with it, that the laws of economics could be bent to their will forever.
Now they see that this was hubris, that their sense of control was just an illusion bought with credit on a scale so large that the numbers had become meaningless.
During the night, emerging market stocks tanked again, led, ominously, by China. This morning the carnage has shifted to the US, where stocks are down hard but, more important, interest rates are still rising. 10-year Treasuries, the key to mortgage rates and pretty much everything else, now yield nearly twice what they did a year ago. That means massive losses for a whole world of risk-averse investors who thought they were parking their money in the safest-possible asset. Presumably the rest of their capital is in riskier places like stocks and junk bonds, which means they’re losing big across the board.
This is a global story, since Treasuries have been everyone’s safe haven of choice for decades. But painful as a 40% haircut for the world’s pension funds might be, it pales next to the impact on growth. US interest rates are, with a few notable exceptions like Japan, the base of the global yield curve. Everything else, being riskier, has to have a higher yield. So a doubling of US rates means a commensurate ratcheting up of everyone else’s rates.
Since equities are valued in part in relation to the yield on available bonds, rising interest rates mean lower stock prices – everywhere. And real estate, which is generally leveraged, has just gotten a lot more expensive (which means the other group obsessively staring at screens these days is the new generation of flippers who recently joined the Southern California and Florida bubbles).
This is the nightmare scenario that keeps central bankers and institutional investors up at night because, based on Japan’s experience with hyper-aggressive monetary ease, there might not be a fix. If even easier money is met with dramatically higher bond yields, as in Japan, then there’s nothing left to do but to let the system unravel.
Not that they won’t try one more role of the dice. It’s just that this time their odds of getting snake eyes have gone way up, and they know it.
Images: Flickr (licence attribution)
About The Author
DollarCollapse.com is managed by John Rubino, co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.