Nomura’s Richard Koo writes in a note …
Now time for some REALTALK from the philosopher / pseudo-economist deep inside of me:
- Low interest rates are (ultimately) deflationary, sustaining zombie-firms in a “liquidity-trap,” which weigh on overall economic performance while also weakening investment.
- Low interest rates and QE are deflationary as you incentivize mal-investment and blow perpetual speculative-asset bubbles, which (ultimately) correct and drive deleveraging—thus the ‘balance sheet recession.’
- As there is still a lot of debt-related “scar tissue,” you can’t push credit on a string. This then leads to quick “muscle memory” returns to a defensive posture: “If there is no return on capital, capital should not be deployed.”
- Now we see the Fed “stuck on this hamster wheel” because neither markets nor the economy apparently can withstand a rising interest rate environment.
He concludes “
Long-term ‘inflation expectations’ will never truly be move higher without full-scale fiscal stimulus (or the future-state of outright ‘helicopter drops,’ shudder)…because debt, disruption and demographic forces are too strong. #BUYBONDS and #PASSOUT”