“Inflation is like toothpaste. Once it's out, you can hardly get it back in again.”
The above quote, from German economist and former Bundesbank president Karl Otto Pohl, sums up the problem that central banks have faced this year: it takes a lot of effort to curb inflation.
Interest rates since 3,000BC
Source: Bank of America, The Public Domain Review, Staatsbibliothek Berlin
The above chart comes from Bank of America’s The Longest Pictures report, which illustrates trends in the economy, interest rates and financial markets in recent decades and centuries.
The bank’s strategists describe this chart as the “most important ‘longest picture’ of the past 15 years”, as it shows the collapse in interest rates to 5,000-year lows followed by, in the past two years, the abrupt end to “this period of monetary excess”.
“In the past 15 years revolutionary monetary policies of quantitative easing, zero interest rate policy, negative interest rate policy [and] yield curve control (1,343 rate cuts, $23tn of asset purchases by central banks) caused an unprecedented decline in short- and long-term interest rates,” they explained.
“This collapse in the price of money was unambiguously positive for financial assets, particularly US stocks and high-yield bonds.”
The 10-year US treasury yield fell to 0.3% – its lowest-ever level – on 9 March 2020 but just three-and-a-half years later and following rate hikes prompted by the pandemic, war, fiscal excess and inflation it stands at close to 5%.
This is, Bank of America’s strategists finished, “a rise that has and will continue to suppress bond and equity returns in the 2020s”.