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Central Bankers Facing ‘Pushing on a String’ Situation

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Central bankers are maxing out on their debt limit

There is only so much one can squeeze out of a debt cycle,” believes Ray Dalio, and central bankers seem to be maxing out on that limit. “In other words, they are simultaneously approaching both their debt limits and central banks’ ‘pushing on a string’ limits,” said Dalio.

Debt limits, as we’ve discussed, are reaching their limits across the developed world (EFA) (VEA). Dalio also sees central bankers approaching their “pushing on a string” limits.

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Now faced with “pushing on a string” limits

“Pushing on a string” refers to not being able to reduce interest rates any further, and QE (quantitative easing) no longer being effective, as risk premiums and spreads have compressed. The wealth gap and other factors are making lending to spenders more challenging. In fact, the Fed’s low interest rate policy has fueled this wealth gap to a certain extent. First, low interest rates have artificially inflated the stock market. As people with wealth tend to own more stock, the wealthy are becoming wealthier. Second, low rates have also lowered the borrowing costs for large corporations, boosting corporate profitability. Again, money flows primarily to the wealthy.

The monetary stimulus that the Fed intended to provide to the economy through quantitative easing and low interest rates did not reach the actual spenders of money on consumer goods, creating the “pushing on a string” situation. The situation is not limited to the United States (SPY). Japan (EWJ), Europe (EZU), and China are in the race too. “Japan is closest to its limits, Europe is a step behind it, the US is a step or two behind Europe, and China is a few steps behind the United States,” noted Ray Dalio. In the next part, we’ll discuss Dalio’s views on where we are in the short- and long-term debt cycles.

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