June 29, 2022

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Felling the ‘magic money tree’ as central banks call time :Mike Dolan

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LONDON — The race is on to declare a paradigm shift in the world economy toward higher inflation and interest rates and the jolt to public borrowing costs could compound the dizzying shocks that led to this.

Lampooned by fiscal hawks as belief in a ‘magic money tree’, ever higher public borrowing and spending had seemed manageable and sensible for many years – hinged as they were on persistently low inflation that allowed central banks largesse to square the debt sustainability maths.

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Embrace of the coincidentally acronymed Modern Monetary Theory – which espouses active use of cheap borrowing to invest in future growth and a sustainable global energy refit – marked a crescendo of that thinking.

But the big test of these ideas is coming far quicker than many suspected only 12 months ago.

In a one-two punch, pandemic lockdowns first floored borrowing rates and exploded government borrowing to prop up economies. But a rush to reboot created wild price distortions and supply bottlenecks that appear persistent and have now been exaggerated by an energy and commodity price squeeze since Russia invaded Ukraine in February.

Central banks have been forced to scramble and rethink, with the U.S. Federal Reserve and Bank of England already raising key policy interest rates to rein in decades-high inflation rates.

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On Tuesday the head of the world’s main central bank forum – the Basel-based Bank for International Settlements – called time on the era of accommodative monetary policy in a speech entitled…


2022-04-06 02:00:43

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