Stop Holding Your Breath For Rates

This time four years ago Covid had well and truly raised its invisible head.

The stock market was in free fall, the Easter show had just been cancelled, and whispers of a depression were getting louder and darker.

Thankfully it never came to that.

But only because world governments crash tackled their economies with steroid like rescue packages.

Namely, endless rivers of stimuli and record low rates.

Since then, only one thing has changed. Interest rates have rocketed despite a string of promises they wouldn’t go up until 2024.

Meanwhile, governments have continued juicing their economies with excessive spending, all of it on borrowed money.

And that’s why you shouldn’t expect rates to come down anytime soon.

Here’s why…it’s called ‘fiscal dominance’.

Simply put, fiscal dominance occurs when the impact of government spending is greater than the impact of rising interest rate hikes.

Meaning, if rate hikes are supposed to suppress inflation, excessive government spending keeps inflation higher for longer.

Hence the reason borrowers should not expect rate cuts to be soon or significant.

Want proof? This time last year, many within the commentariat were expecting a rate cut by Christmas 2023. Then as we approached December they pushed their forecasts out to March, now it’s June.

But forecasting is a binary game. You’re damned if you do and damned if you don’t. I’ve been there myself.

The problem with fiscal dominance is that most spending is industry specific. E.g. infrastructure, public sector wage increases, etc.

You can throw immigaration into the mix as well because the inflationary knock-on effects are significant. e.g. housing crisis.

Fiscal dominance results in uneven spending which means not everyone benefits and eventually it creates a larger socio-economic divide within the economy.

The most disappointing aspect of all this is we shouldn’t be in this situation at all.

The best economic stimulant in the past four years was a vaccine. After that, the economy didn’t need another shot in the arm.

Getting people back to work and driving productivity was all we needed. Instead, the government has made it too easy for people to stay at home surfing the couch, collecting handouts.

Consequently, we now have a growing mountain of debt and falling productivity.

A good healthy economy should be the exact opposite – falling debt levels as a result of increasing productivity.

If that were the case, inflation wouldn’t be a problem and borrowers wouldn’t be sitting bolt-upright in bed at night worried about rates.

But at least they’ve swung the gates wide open again, ready for another bumper Easter show.

Have a great weekend!

Adam

Back paddock – laughter is the sound of comprehension.