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The end of easy money

Leonardo DiCaprio splashing the cash in The Wolf of Wall Street (2013)

When the legendary investor Howard Marks asks people what they think is the most important financial event in recent decades, says Ben Wright in The Daily Telegraph, they typically go for one of the usual suspects: the 2008 global financial crisis, say, or the dotcom bubble bursting. But Marks reckons it’s something much less obvious: the 20-percentage-point decline in interest rates between 1980 and 2020. Until the past couple of years, the “vast majority” of people working in finance, and indeed politics, had only ever worked in an environment with ultra-low borrowing costs. This allowed them to spend more freely, and recklessly, than ever before. British chancellors, for example, have broken 15 of the 26 “fiscal rules” imposed by the government since 1997 – and investors simply haven’t cared.

Now, finally, we’re emerging from our “zero interest-rate-induced coma” – and things are going to be very different. Interest payments on government debt will soon be around £30bn higher than we’re used to. The Liz Truss debacle demonstrated that international investors will no longer take the British government’s word. The markets are even starting to “ask probing questions” about the sustainability of America’s finances. This is not to say that the UK, or indeed the US, is about to default. But we’ll have to work a lot harder – and offer more generous terms – to persuade investors to give us the benefit of the doubt. For Jeremy Hunt and his successor as chancellor, “the battle has only just begun”.

💸🤨 Perhaps the best illustration of how low interest rates clouded people’s judgement was “Modern Monetary Theory” – the idea, pushed by “apparently intelligent people”, that countries with control of their own currencies could effectively borrow at will, and stop worrying about deficits and national debt. “We don’t hear so much from those guys these days.”