zerohedge.com / Tyler Durden / March 14, 2013, 11:53 -0400
It seems more likely to Morgan Stanley’s Gerard Minack that may win the battle: sustaining recovery in developed economies with extraordinarily loose monetary policy. For a while this would go hand-in-hand with better equity performance. The battle is against a crisis caused by too loose monetary policy, elevated debt and mis-priced risk. Ironically, he notes, central bankers may overcome these problems by running even looser monetary policy, encouraging a new round of levering up, and fresh mis-pricing of risk. However, winning the battle isn’t winning the war. If central bankers do win this round, the next downturn could be, in Minack’s view, an omnishambles.
It has not been clear to me that central bankers could single-handedly sustain recovery.Fiscal stimulus helped recovery, but its withdrawal contributed to renewed recession in Europe and the UK. Markets now assume that fiscal tightening in the US will not end the same way that it did elsewhere. My economic colleagues also see better times ahead. In short, it may be that extraordinarily loose money policy will work.
This, on a medium-term view, worries me:
First, monetary policy will have succeeded, in part, by driving interest rates to all-time lows. It is not just policy rates at extreme lows: more importantly, the average effective rate paid on debt is exceptionally low. Exhibit 1 shows the average effective interest paid on the entire stock of (public and private) debt in the US.