Christian de Boissieu is not an economist of the attic, he is an economist of the great salons with a resume as long as your arm and his Wikipedia page and which is awash with decorations and medals, that is, the boy’s seriousness.
That’s what he says.
“Long-term interest rates are rising and the movement has accelerated in recent weeks. Ten-year yields on US government bonds, for instance, rose from 1.5% at the end of 2021 to almost 2.5% at the end of March 2022. Parallel rise in French ten-year yields, from 0.19% at the end of 2021 to slightly more than 1% at the end of March and long-term interest rates elsewhere .
The awakening is brutal and it is far from over. After years of long-term interest rates near zero or even negative, the “normalization” is starting to work. It is fueled by inflation, strong and sustainable with the dual energy and food shock caused by the war in Ukraine and its aftermath. Before Ukraine, I still believed in the possibility of an inflation bump that could be absorbed fairly quickly in 2022. Now the scenario of the hump is in limbo. Inflation is all the more so as inflation expectations, on the part of businesses and households, fuel it and because fears of significant losses in purchasing power legitimize wage increases.”
And the Boissieu confirms what Norman hens have known for a long time!
“Faced with the stagflation scenario, central banks are in trouble. Or they are quick to tighten monetary policy at the risk of provoking or deepening a recession. Rather, it is the Fed’s choice, with six likely hikes in its key rate by the end of the year, after another day. Or they tighten cautiously, but at the risk of not breaking inflationary pressures. This is the ECB’s strategy, which lowers QE (bond purchases) without affecting the key rate for the time being.
Central bankers, at least the oldest among them, still remember the bond market crash of 1994, caused at the time by the Fed’s ‘small steps’. Do everything you can to escape the 1994 scenario, to prevent the bond markets and the funds invested in them from fleeing.”
If interest rates are not raised, it means that inflation is gaining a foothold and developing. Raising rates is creating a recession from scratch!
There’s no good solution anymore… I’m kidding because we knew, not because it would be fun.
And de Boissieu to finish his reasoning…
1) Pretty much everywhere, slower in the Eurozone than in the United States because economic cycles have shifted, the yield curve is “turning” after this long phase of a flat curve (or almost). All in all, this is good news for financial intermediaries (banks, insurance companies, etc.) and for savers. Long-term rates that are significantly higher than short-term rates mean the return of term premiums, which encourages investors to invest for the long term. In the United States, the steepening does not currently prevent the inversion of the curve at certain maturities below 10 years. A leading indicator of a possible recession?
2) While nominal interest rates are “normalizing”, the same is not true for real interest rates (rates excluding inflation). For the coming months, given the magnitude of the price shock, I expect inflation to rise faster than nominal rates (long term and of course short term), meaning a cut in real interest rates, which are already largely negative. The decline in real interest rates during this transition phase will not be enough to stimulate business investment, as the geopolitical fog will remain closed for the rest of the year.
3) The fall in real interest rates just mentioned will last for several months. Ultimately, if inflation is under control, real rates will follow the movement of nominal rates. No offense to certain economists who promised us a sustainable installation in the lower-tier regime, the interest rate shock that is far from over will change the sustainability of public and private debt. Because that sustainability mainly depends on the gap between growth rate and interest rates.
4) The ECB faces a challenge that the Fed is not addressing: to avoid a new fragmentation of the euro area, after that of 2010-2013, and thus the widening of the risk premia that the fragile countries of the area could suffer in general. rise in interest rates. Faced with this risk of financial fragmentation within the zone, the answers are more or less identified: pragmatism and credibility! †
And yes, for the eurozone there is also a risk of “fragmentation”, translating into explosion. We unadorned attic economists have a little more freedom of speech. Fortunately, the central banks will save us with “pragmatism and credibility”.
There I puff, what am I saying I laugh!
It’s not a matter of credibility, it’s that we’re stuck.
Either we let it happen and inflation will explode and the purchasing power of the people will decrease very quickly.
Either we try to fight inflation by raising rates, which means that no more or less Russian gas comes in, and we accelerate a recession.
Moreover, if we lose control of rates in the Eurozone with a heterogeneous indebtedness between countries like Germany, Austria and the Netherlands on the one hand and France, Italy and Greece on the other, it will be a monetary catastrophe. If the euro explodes (which would allow us to regain our monetary sovereignty and would therefore be a good thing), it will inevitably be painful, but unlike the slow pain that this single currency has been giving us for over twenty years .
To all this you can add that we import everything, from China for our gadgets, and from Russia for a large part for our energy.
Europe is a colossus on clay feet that will falter in the coming months.
The question is simple.
Shall we hold out, or will we collapse?
If we hold on, all the better, but just in case, prepare for the collapse scenario. It’s more careful.
“This is a ‘presslib’ article, meaning wholly or partly reproduction-free, provided this paragraph is reproduced after it. Insolentiae.com is the site where Charles Sannat speaks out on a daily basis, delivering brutal and uncompromising analysis of economic news. Thanks for visiting my site. You can subscribe to the daily newsletter for free at www.insolentiae.com. †
Source the Circle of Economists via boursorama.com here