TIME magazine covers often capture the mood of a moment. And that was certainly true in February 1999, with their now famous cover picturing then US Federal Reserve Chairman, Alan Greenspan, under the heading “The Committee to SAVE the World“.
In a further sign of the times, Greenspan was flanked by the US Treasury Secretary and his Deputy, Robert Rubin and Lawrence Summers. The message was clear – the central bank led, and the government followed. And their remit was indeed global, as Time commented:
“As volatility has upset foreign markets and economic models, the three men have forged a unique partnership to prevent the turmoil from engulfing the globe”.
The cover set the pattern for the next 15 years:
“Dotcom crisis in 2000” – call for Greenspan; “Subprime crisis in 2008” – call for his successor, Bernanke
Regional crises were the same. “Eurozone debt crisis in 2012” – call for ECB President, Draghi; Japanese deflation in 2013 – call for Bank of Japan Governor, Kuroda; “Brexit crisis in 2016” – call for Bank of England governor, Carney
US 10 year rates have risen by a third from their July low to 1.8%
German rates have gone from a negative 0.2% to a positive 0.06%
Even Japanese rates have risen from a negative 0.3% to a negative 0.05%
These are major moves in such a short space of time, especially when one remembers these bonds are supposed to be “risk-free”. Clearly markets are starting to worry that they may not be “risk-free” after all.
In the past, the central banks had made the task of managing the global economy seem very easy. These incredibly powerful men (and today, one woman), seemed able to resolve any financial crisis with a nod and a wink to their friends in the markets, backed up by an interest rate cut and a round of money-printing.
And, of course, markets wanted to believe what they were being told. After all, hadn’t Greenspan invented the “Greenspan put”? This was a phrase derived from the Options market, which meant traders knew he would ride to the rescue if ever markets looked like falling out of bed.
It is true that sometimes (as with subprime) central banks appeared rather slow to realise that a crisis was brewing. But as soon as they did notice, they went straight into action to make sure prices went straight back up again, as Greenspan’s successors followed “The Master of the Universe’s” teaching.
His departure was followed by the “Bernanke put”, and then the “Yellen put”, when Janet Yellen took over at the Fed. Traders therefore learnt to borrow as much as possible after 2000, as Doug Short’s chart shows of margin debt on the New York Stock Exchange. Being bold was best, when you knew the central bank would always cover your back.
But today, many traders worry that their super-heroes can’t actually create the promised growth? They wonder how governments can pay back the vast sums of money they have borrowed for the monetary experiment? How would markets react if, one day, a major economy proved unable or unwilling to pay its debts?
And they are not alone in worrying. Even the IMF has woken up to the fact that borrowing has now doubled to $152tn since 2000, and is still rising. 15 years is, after all, a long time for an experiment to run, without producing the expected results. At some point, the funding tap must be turned off.
This is the Great Reckoning in action. Clearly some traders and investors now don’t believe that monetary policy can deliver the promised results. And as I noted on Friday, even one of the US Federal Reserve Banks has now come close to accepting our argument that demographics – not central banks – really drive the global economy.