There is a sense of mild panic in the City as the end of cheap money appears on the horizon. An interest rate rise is nearing.
Minutes of the last meeting of Bank of England policy committee show that, members where surprised
by the data on GDP's growth
Minutes of the last meeting of Bank of England policy committee show that, members where surprised
by the data on GDP's growth
Maybe not tomorrow, when GDP for the third quarter is expected to be strong, or even next year, but most likely before the Bank of England's target date of late 2016.
There is a sense of unease among those investors who rely on base rates at 0.5% to give them an easy profit. Banks, in particular, have recovered on the back of cheap funds, much of which they have retained to rebuild their balance sheets rather than pass on to customers.
Societé Genérale's global strategist, argues in a note for clients that four years of low rates have encouraged a return of the kind of risky investment behaviour that we saw before the crash. He cites evidence, albeit anecdotal, that the crazy derivatives favoured by traders prior to 2008 are in heavy use and posing a distinct danger to the stability of world markets. He calls as evidence an interview in the Financial Times where Craig Parker, head of leveraged finance at Goldman Sachs, says: "We're in the third year of the greatest leveraged finance markets of all time because of the efforts by the Fed, and all the central banks around the world, to keep rates at zero."
Analysts say, there are signs of asset bubbles everywhere and the US, the UK and Japan are standing on the edge of a precipice, much as they did in 2006.
Making matters worse is the seductive charm of low interest rates for governments. Most western governments have borrowed heavily in the last four years. The UK has doubled its debt mountain and is still running a considerable annual budget deficit.
Whatever each government's bond strategy, they are all relying on cheap borrowing for their newly minted debt.
In the UK's case, the Bank of England has been a major buyer and now owns around a third of the overall total. Without the central bank as a buyer, demand will be lower and the interest rate higher.
So quantitative easing and low interes rates,are not only good for motrgage payers,investors who speculate with cheap,money, but it also helps governmet issuance of bonds.
So quantitative easing and low interes rates,are not only good for motrgage payers,investors who speculate with cheap,money, but it also helps governmet issuance of bonds.
Sadly, bringing current spending under control is not a silver bullet when there is so much debt coming up for renewal, which is why finance ministers are tempted to just keep low rates rolling along forever, or at least until the middle distance.
Edwards argues that Japan is now in a situation where it must keep pumping more and more into its system just to stay afloat .
Sure, left to its own devices, the UK property market will accelerate, there will be a bubble and the bubble will burst. Just give it five years.
The global system is becoming unstable as QE distorts private sector and government behaviour, it needs to be addressed openly by central banks and politicians alike.
The global system is becoming unstable as QE distorts private sector and government behaviour, it needs to be addressed openly by central banks and politicians alike.
