Bullshift by John J. De Goey

Author:John J. De Goey
Language: eng
Format: epub
Publisher: Dundurn Press

Canada

-5.8% (1% rate, 6.8% inflation)

U.S.

-7.4% (0.875% rate, 8.3% inflation)

Eurozone

-7.9% (-.5% rate, 7.4% inflation)

U.K.

-8% (1% rate, 9.0% inflation)

Central bankers found themselves way behind the curve and in desperate need of playing catch-up. Inflation was at a thirty-year high and climbing steadily, yet they seemed content to do nothing until the situation became desperate.

By the summer of 2022, the broad-based perpetual bullishness that investors had come to know for the past several decades came face to face with the larger economic imperative of keeping inflation in check, no matter what the consequences might be. From the spring of 2020 until the end of 2021, central bankers were universally accommodative and, as a result, people thought they were being prudent by being bullish. Recency bias was playing games with people’s psyches and the collective behaviour of retail investors failed to adjust to the newfound hawkishness of central bankers. Thinking the recent past would be a reliable guide to the foreseeable future, most people chose to stay invested even though markets were dropping and further rate hikes were clearly on the horizon.

So, what have we learned? First, everyone seemed determined to fight the last war. Given that the response to the GFC was too timid, policymakers erred on the side of stronger intervention in 2020. In hindsight, many now think the Covid-19 response would have been best for the GFC and the GFC response best for Covid-19. Both were correct in direction and both more or less worked, but the appropriate interventions for each seem to have been switched. Even the right policies, if not timed or calibrated properly, can bring a whole new set of problems that policy experts call “unintended consequences.”

The lesson in all this is that central bankers are human, and micromanaging the disparate elements of a modern economy is not for the faint of heart. Many people were pleasantly shocked at how swift and purposeful a central bank (and national government) response to a pandemic can be. The speed and magnitude of the intervention were unprecedented in every way. That response, in turn, led to a massive run-up in asset prices for virtually all asset classes. It also exacerbated several challenging socio-economic conditions that had been lingering just below the surface. There is little doubt that the easy money policies of central bankers not only gave rise to inflation, but also fuelled populism, as well as social and income inequality. Markets boomed because central bankers provided an environment that allowed them to boom. A degree of cognitive dissonance took hold and no one wanted the party to end, so central bankers were late in taking away the punch bowl. But even great parties must end eventually.

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