ROOM FULL OF MIRRORS
“I used to live in a room full of mirrors. All I could see was me. Well, I take my spirit and I smash my mirrors. Now the whole world is here for me to see” (Jimi Hendrix, 1970)
A room full of mirrors and the accompanying sense of intense anxiety that it engenders, seems to be an apt analogy for the current confusion and uncertainty about the economic outlook, and how investors should position themselves in that context. As has been well documented, central banks around the world have shifted to aggressive rate hike cycles, having belatedly woken up to the fact that supply- side drivers of inflation during the recovery from the pandemic shock were never likely to be transient. One can certainly fault central banks for their deeply flawed and rigidly textbook analyses of the world economy; for failing to have a proper understanding of supply chains, and above all for adopting reactive, rather than proactive policy stances. But in truth, the world has been far too reliant on central banks to control demand, while ignoring and failing to deal with the array of supply-side issues that have been accumulating since the end of the Cold War, and which were brutally exposed by the pandemic, and latterly the Russian invasion of Ukraine.
But it should be remembered that there were plenty of red flag warnings on this chronic over reliance on monetary policy, and the accompanying paralysis of politic elites in enacting reforms of fiscal and structural policies. Perhaps the most poignant of these was that while global GDP expanded by ca. $20.0 Trillion in the 2010-19 decade, global debt rose by $50 Trillion in the same period. In other words, every $1.0 of growth required $2.5 of new debt, which was obviously unsustainable. Then came the explosive growth in government borrowing during the pandemic, most of which was again absorbed by central bank QE, in what was a very necessary coordination of fiscal and monetary policy. But that crisis moment coordination has passed, and governments are once again relying on central banks to do all the ‘heavy lifting’ in curbing the surge in supply-side driven inflation, with the very blunt instrument of interest rates to curb demand.
2010-19 decade Global GDP expanded by ca.
$20.0 Trillion $50 Trillion
2010-19 decade Global debt rose by In other words
Every $1.0 of growth required $2.5 of new debt
14 | ADMISI - The Ghost In The Machine | Q2 Edition 2022
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