Since the Great Recession, the Fed has transformed itself into an entity more and more responsible for asset prices. This was the stated goal since 2009 as the Fed adopted a new philosophy called the "Wealth Effect." The thinking behind it was simple: growth in asset prices would translate to an increase in consumer spending and hence demand itself. It was a 'trickle down' economic philosophy an increasingly financialized economy.
This backdrop has defined our post-2009 era which stirred certain pathologies that were reflected in the greater culture and politics. It was the time when 'finance became a culture' and actual-productivity plummeted across most developed economies, especially the United States. But somehow in spite of the accumulating dysfunction across most key areas, everything kept trudging along, partly thanks to investors being satiated with record returns.
While the near-zero interest rate regime may now be ending, it is worth considering how much of the water we were all swimming in excused poor state capacity, distorted economic fundamentals, and how it even kept a lid on the dysfunction potentially blowing up in our faces. Now that we have to reckon with these realities, it may be wise to ask how many worldviews were simply products of the the cheap money regime - which is now, in a shock to many, coming to a close. Whether or not it will easily be let go, however, is another matter.
Jump in the discussion.
No email address required.
Notes -
There was comparable excess in the 80s and 90s despite even higher interest rates than now. The greatest asset bubble ever, the late 90s tech boom, was against a backdrop of 5-6% interest rates. High interest rates do not change things much. Yeah, 4% interest rates makes cash more attractive, but this is not going to stop huge tech companies from generating record profits. nor will it stop speculation.
FTX had pension funds as major equity investors. That doesn't happen in a world where you can get investment-grade bonds that yield 7%.
madoff's fund had major inflows in the 90s despite even higher interest rates . Its real return was only 3% yet this was enough to attract billions
He made real 3% with almost no volatility, that's like having a financial cheat code.
He did have a financial cheat code, to be fair ...
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link