By PETER S. GOODMANFEB. 6, 2018
A decade-long era of easy access to money engineered by central banks in Asia, Europe and the United States is ending.
Mere days ago, in what feels like a different era now, the biggest thing that people in control of money appeared to fear was complacency. Stock markets in the United States were surging, enthralled by the regulation-slashing, tax-shrinking predilections of President Trump. Every major economy in the world was expanding.
The worst that could happen, the money masters averred, was that investors would be lulled into reckless investments, taking on too much risk in the belief that the dangers of the marketplace had been tamed.
As it turns out, the dangers were already at work. A decade-long era of easy access to money engineered by central banks in Asia, Europe and the United States was ending, opening a new chapter in which corporations would have to pay more to borrow and ordinary people would have to pay more to finance homes, cars and other purchases.
To digest the wild swings in stocks and bonds from New York to London to Tokyo is to absorb this uncomfortable realization taking hold.
nvestors concluded that interest rates would rise faster than they had anticipated, almost certainly in the United States, and perhaps eventually in Europe and Asia, too. They yanked their treasure out of stocks and entrusted it to safer repositories of wealth like bonds and cash.
A wave of selling commenced in New York on Friday, continued in Asia and Europe on Monday, and then completed its trans-global journey with a sharp drop where it had all started. While a global rout continued into Tuesday, anxiety subsided in the United States. 500 is still more than 6 percent off its peak in late January.
No degree in finance was required to divine the lesson of the moment: Markets go down as well as up, a reality often drowned out by the euphoric celebrations to greet one record or another being shattered.
While trading in the United States was clearly the initial source of alarm, the concerns spread to everywhere that money changes hands. The American economy had swapped the frivolity of a stock market party for the grim trappings of a bedside vigil. The result was gloom and anxiety in every reach of the financial sphere.
The fear that seized the United States was the spawn of good times. As the feeling sank in that stock trading was governed by a surplus of exuberance, the odds increased that the Federal Reserve would dampen the festivities by lifting interest rates faster than policymakers had previously telegraphed.
Not for nothing, central banks are seen by investors as crucial yet fun-averse grown-ups charged with solemnly watching for trouble. When crises emerge, they make money available to spur commerce while keeping terror at bay. The global economic expansion underway now is in large part a product of the Fed swiftly unleashing an overwhelming surge of credit after the start of the financial crisis in 2008, combined with the slower yet, eventually, effective torrent of cash delivered by the European Central Bank.
But when the party gets raging when economies accelerate and stock prices ascend to levels out of whack with fundamentals central bankers play killjoy, lifting interest rates to snuff out attendant dangers.
Higher rates diminish speculation that can end badly by making credit more expensive. They slow economic growth while making stocks less appealing, because corporations must pay more to keep up with their debts. Investors can make more just by keeping their holdings in cash or bonds, rather than by accepting the higher risk of stocks.
The bitter irony of the current swoon is that it was triggered by the emergence of something the world has been awaiting for years: higher wages for workers.
Even as unemployment rates have lowered drastically in Britain, Japan and the United States, companies have continued to find new ways to make more products and sell more services without paying more to their employees. This has been a major source of unhappiness among working people, and a subject of consternation among policymakers.
Then, last Friday, the latest monthly snapshot of the American labor market revealed that wages had climbed 2.9 percent in January compared with a year earlier. The tight job market was forcing employers to pay more.
This appeared to presage a strengthening of American consumer power. If more working people take home more money, they will presumably be more inclined to buy houses and cars, generating jobs in construction and at auto plants from Michigan to South Carolina. They will fill restaurants, necessitating more truck drivers to ferry the food, and more mechanics to keep the trucks running.