Monetary Policy & Inflation | Rates
2022 Grey Swan #11: Real Rates Armageddon: Pensions Are Destroyed
- By Karl Massey
- 3 min read
Despite rising debt loads, corporate balance sheets have remained broadly healthy throughout 2020 and 2021, supported by the tsunami of central bank and government actions. However, markets appear to have fully priced this positive backdrop.
The new dynamic is the Fed tapering its bond purchases and planning to hike rates in the face of high inflation. The intent is to tighten monetary conditions. But should we assume this rate-rising cycle will be no more than 50-100bps before the wheels fall off the highly debt-encumbered economy?
In our current inflation-obsessed world, perhaps we should expect the current spike to be transitory indeed. But rather than returning to disinflation, we could progress to a new unfamiliar world with more stubbornly higher inflation, say 2-4%. This would imply real yields go deeper into negative territory and stay there. Combine this with lower growth and we could get a toxic cocktail – growth too ‘low’ to support debt, inflation too ‘high’ to enable loose conditions.
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