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Christian Armbruester

Runaway Train



Why every good party must come to an end.


It makes no sense. If prices are going up because of some exogenous sequence of events, then why punish the consumer even more with higher interest rates? It’s the debate of our time and apparently it is the medicine that always delivers. If we look at the seventies and the last time we faced a supply shock of this magnitude, interest rates had to rise close to 20% before we entered the greatest bull market of all times. So what should we expect from a situation where inflation is running wild, yet our cost of capital still remains near historic lows?


Clearly, rates cannot rise to where they once were. That has to do with the amount of debt we already have to service, which starts with a three and has fifteen zeros. At current rates of interest, we are paying less than 5% of global GDP to finance our homes, cars, welfare, healthcare, warfare and other Whitehall waste. If interest rates were to rise to say 10% as some pundits are suggesting, we would need to spend nearly half of everything we make to keep from going bankrupt. Rest assured that no matter how bad things will get, there is a limit to how high rates can rise. Just look at Turkey and you can see what that means.


Ultimately, supply and demand have to find an equilibrium. If the consumer has less money to spend, because mortgage payments have gone up, the cost of living has increased and why not throw in higher taxes for good measure, then demand will fall off a cliff. From there, prices should come down or so the theory goes. The problem is, I don’t think Mr. Putin really cares about the pain of managing my spending. They could raise interest rates to 100%, but my heating bill will still be the same.


We could keep borrowing to purchase more of the goods and services that make up two thirds of our economy, but adding more debt seems a lot less appealing when you are paying more for what you already owe. Either the central banks are getting high on their own supplies, or there is something we may have missed as the ones having to pay for it all. Having said that, the guys who won the Nobel Prizes scrutinising lots of intersecting curves whilst holding everything else constant also can’t seem to agree. One thing seems certain: the bill for getting us out of this mess is going to be huge.


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