Today Car discusses what many economists believe that international demand for dollars (in the form of our debt such as Treasury Bills) allows the United States to maintain huge trade deficits, without fear of major US currency devaluation. But what were seeing now in this next downtown could be a paradigm shift. Quantitative easing and low — even negative — interest rates, which have become a way for central banks to prop up asset markets across the globe are at great risk.
According to Ray Dalio:
More specifically, central bank policies will push short-term and long-term real and nominal interest rates very low and print money to buy financial assets because they will need to set short-term interest rates as low as possible due to the large debt and other obligations (e.g. pensions and healthcare obligation) that are coming due and because of weakness in the economy and low inflation. Their hope will be that doing so will drive the expected returns of cash below the expected returns of bonds, but that won’t work well because a) these rates are too close to their floors, b) there is a weakening in growth and inflation expectations which is also lowering the expected returns of equities, c) real rates need to go very low because of the large debt and other obligations coming due, and d) the purchases of financial assets by central banks stays in the hands of investors rather than trickles down to most of the economy (which worsens the wealth gap and the populist political responses). This has happened at a time when investors have become increasingly leveraged long due to the low interest rates and their increased liquidity. As a result we see the market driving down short term rates while central banks are also turning more toward long-term interest rate and yield curve controls, just as they did from the late 1930s through most of the 1940s.
The Three Big Issues and the 1930s Analogue
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Car also gives you his analysis on where this is all heading on 5 good minutes and gives you his cold hard truth he realized this weekend.
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