A central bank fairy tale

Lockdown was much different back in the 1970s – we didn’t even know we were in lockdown. Our head of fixed income Bryn Jones thinks we’ve come a long way over his lifetime.

Apollo 15

Too many decades ago, in a kingdom just down the road, interest rates were a very different story to today.

I can still remember listening to mum and dad talking about facing 16% mortgage rates. My mum ready to get out selling Tupperware to augment my dad’s curtailed wages from three-day weeks as an engineer. We had candles on that winter and if you were cold you put on your entire wardrobe. We made formula one cars out of old cigarette boxes with match sticks for axels and buttons for wheels. We were in lockdown then too, but only because we had no money to do anything else! You made your own fun … a full-sized pool table in the lounge, exercise, bike rides, football, racing other kids and having punch ups was what we did.

Imagine the bonkers fairy tale my mother could have told me as I was tucked up in my bed before she blew the candle out that night: “Into the kingdom came central banks that kept rates at zero percent forever. Mortgage payments made up 29% of peoples’ pay (and  if they need it the bank would give them a mortgage holiday). The central banks did this so we can all go out and spend as much on candles as we like. Not to light the front room but to have on in front of the fireplace to make evenings more romantic and atmospheric while you watch the latest TV shows on a streaming service. Never you mind what a streaming service is, all you need to know is you’ll have enough TV to turn your eyes into trapezoids, let alone squares.

“Now, where was I? Oh yes, you’ll have enough money to put the heating on and have the windows open at the same time. Yes, you can even sit around in your pants if you like. And the central banks will keep rates low to help everyone borrow money and keep their mortgage payments low so they can pay massive satellite bills. Yes, they will have ironed out all the problems with the satellites by then. And those satellites will change how everyone lives. You will be able to order your dinner from your phone. No it will have touchscreens – like in that Kubrick film. And those phones will also let you speak to people with video like they were next to you, but people will just send little cartoon pictures to each other instead. Yes, they will still be spending billions of dollars to get to the moon. No, Bryn, of course they made it to the moon in ’69 – they wouldn’t lie to us. And don’t worry about the ice on the window, just get to sleep and in the morning it will be condensation and you won’t have to go downstairs to get more water, will you?”

Yep, we’ve come a long way. There’s only one thing in this world that offers more liquidity than a British bedroom window in the ’70s: the US Federal Reserve. It confirmed that it would continue its quantitative easing (QE) programme at the current pace for “many months”. That’s a minimum of $1.1 trillion of bond purchases this year, near enough to investment bank Morgan Stanley’ forecast of $1.3 trillion.  The Fed now owns about $7 trillion of bonds and other assets, it could top $10 trillion before it’s finished. The Bank of England is next up. After its 17 June meeting, there will only be two weeks of QE purchases left before it hits the limit it has set. I think the BoE will have to add another £100 billion to its programme, at least. The fairy tale goes on. It’s no wonder stocks were testing new highs and corporate bond values were marching higher. Do we actually live in a capitalist system anymore? When we were growing up we were told communism was bad – an evil thing – and we had the Cold War to defend ourselves from its influence. Perhaps this central bank fairy tale suggests a more socialistic system isn’t as bad as some thought.

This yarn may sound like I think that the central banks are making a mistake by pouring so much cash into the markets. That’s not it! I don’t want to go back to the ’70s. Nostalgia is a dangerous thing – nothing warms terrible times past like sepia tone. I’m just astonished at how different two situations and responses can be within my lifetime. I have no idea what the effects of policy responses will be – no one does, they’re unprecedented.

But what I do like about today is that governments and central banks’ first reaction in our current crisis was to protect people and their livelihoods as much as possible. Mistakes were made, and everything isn’t roses and champagne on planet earth. And as evidence that the world is always messier than fairy tales, American police have shown us that some terrible attitudes from the ’70s still survive among us.

I think we’re always stronger as people when we help each other. And I hope we all keep co-operating through this pandemic and the unsettling dislocation of life it has created. Not just within our day-to-day communities, either, but among nations. Europe (and hopefully the US) has started to emerge from the worst of the pandemic. Yet infections are rising rapidly in the developing world. And it’s not just COVID-19 that’s hurting people, either. Children in many African nations are missing measles jabs, polio is at risk of resurfacing in Nigeria, and malaria in Cameroon. These countries need our help, and we have to be quick in delivering it. In our Ethical Bond Fund, we’ve been buying COVID-19 bonds which have altogether raised more than $150bn for fighting the pandemic and supporting day-to-day healthcare and commerce in the developing world.

The global economic collapse is going to throw millions of people into poverty. A Johns Hopkins University study suggests that across hundreds of poor and middle-income countries 1.2 million children could die due to poverty created by the global lockdowns. They need more than fairy tales, they need money and aid. It’s our duty to give it.


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