While many commentators are calling on central banks to stop tightening and start increasing monetary slack once more as the global slowdown deepens, the fact is that current financial strife has been purchased by years of central bank slack that drove overcapacity and mal-investment through the global economy. Economist Daniel Lacelle explains truth well in this clip.
Stop blaming the Fed’s rate hikes and alleged trade wars.
The current slowdown in China and the EU is not due to lack of stimuli, but because of them. pic.twitter.com/17K6QAyZCT
— Daniel Lacalle (@dlacalle_IA) January 14, 2019
And as I pointed out last week here historically bear market bottoms are not reached until a few months after central bank loosening cycles have been ongoing for several quarters and have cut up to 5 percentage points off of policy rates. So far today, the most influential central banks are still in a self-proclaimed tightening cycle with little over 2% of rate room to maneuver. Years of debt largesse have painted world markets into this corner, rate cuts from here will be no magic elixir, but significantly lower prices will be a key part of the healing process needed.
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