The full force of monetary expansion – not to be confused with liquidity, which can move in the opposite direction – will kick in just as the one-off effects of cheap oil are washed out of the price data. “Forecasters ignore broad money at their peril,” says Gabriel Stein, at Oxford Economics.
Inflation will soon be flirting with 2pc across the Atlantic world. Within a year, the global economic landscape will look entirely different, with an emphasis on the word “look”. In my view this will prove to be mini-cyclical in a world of “secular stagnation” and deficient demand, but mini-cycles can be powerful.
Mr Stein said total loans in the US are now growing at a faster rate (six-month annualised) than during the five-year build-up to the Lehman crisis. “The risk is that the Fed will have to raise rates much more quickly than the markets expect. This is what happened in 1994,” he said.
That episode set off a bond rout. Yields on 10-year US Treasuries rose 260 basis points over 15 months, resetting the global price of money. It detonated Mexico’s Tequila crisis.
Bonds are even more vulnerable to a reflation shock today. You need a very strong nerve to buy German 10-year Bunds at the current yield of 0.16pc, or French bonds at 0.43pc, at time when EMU money data no longer look remotely “Japanese”.
Granted, there may be tactical reasons for buying Bunds, even at negative yields out to eight years maturity. Supply is drying up. Berlin is pursuing a budget surplus with religious zeal, paying down €18bn of debt over the past year. It has left the Bundesbank little to buy as it launches its share of QE.
Yet this is collecting pfennigs on the rails of a high-speed train. The German property market is on the cusp of a boom. David Roberts, of Kames Capital, warns of a “poisonous cocktail” of resurgent inflation and rising wages. “If you look at Bunds in anything other than the shortest possible timescale, the risk becomes very clear.”
US bond markets are equally vulnerable. Investors are pricing in rates of 0.9pc by the end of 2016, compared with 1.875pc by the Fed itself. This is extraordinary. The St Louis Fed’s James Bullard could hardly have been clearer on a recent trip to London.
“I think reconciliation between what markets think and what the committee (FOMC) thinks will have to happen at some point. That’s a potentially violent reconciliation,” he said.
It is not as if the Fed is hawkish. It is rightly wary of tightening with the labour participation rate still stuck at a 40-year low of 62.7pc. Yet the market is turning. The quit rate – a gauge of willingness to look for a better job – is nearing 2pc, the level when employers must build pay-moats to keep workers.
It is true that the US economy gave a good imitation of hitting a brick wall in the first quarter. Retail sales have fallen for three months, the worst drop since 2009. The Atlanta Fed’s snap indicator – GDPNow – suggests that growth dropped to stall speed in March. The rise in non-farm payrolls slumped 126,000 in March, half expectations.
Yet economies do not fall out of sky. The US has already survived the biggest fiscal squeeze since demobilisation after the Korean War without falling into recession. Fiscal policy is now neutral.
The oil crash is a net plus: every one cent cut in petrol prices adds $1bn to the US economy as a de facto “tax cut”. The eurozone is recovering.
The rising dollar cannot alone explain what has happened. The US tradeable sector is too small, and the time-lags are too long. New York Fed chief Bill Dudley said the 15pc rise since mid-2014 has been a “significant shock” and will knock 0.6pc off GDP this year, but it is not enough to derail recovery. Let us blame this recession scare on winter snow, the sort of anomaly that happens from time to time.
The greater threat – muttered sotto voce at the IMF Spring meeting this week – is that the Fed will soon be forced to hit the brakes hard, throwing dollar-debtors through the windscreen across the emerging world.
The official line is that all is under control. There will be no repeat of the “taper tantrum” in 2013. Behind the scenes, IMF officials acknowledge that it may be worse, a full-fledged margin call on $9 trillion of external dollar borrowing, much of it by companies in China, Hong Kong, Brazil, Mexico, South Africa and Russia. They fear too that it will combine with a nasty unwinding of East Asia’s internal credit bubble.
Willem Buiter, at Citigroup, says those countries that drank mostly from the cup of global dollar liquidity when the Fed was feeling generous are about to discover that not all forms of stimulus are equal.
The world is still on a dollar-standard, moving to US monetary rhythms, whatever central banks elsewhere may be doing. You cannot offset QE in Japan and Europe, against the end of QE in the US, let alone US rate rises. They are not remotely equivalent.
“The dollar is the only global reserve currency worth the name. The euro is in intensive care, the yen is too small, nobody has heard of sterling, and the renminbi is not yet ready for prime time. Strangely enough, the dollar is more dominant today than I remember in a long time,” he said.
Global lending in dollars has grown fourfold since 2000. We will find out over the next 18 months whether the world can withstand the rigours of Fed tightening and a dollar drought, or indeed whether the US itself is strong enough to withstand the eventual economic blowback if this turns serious.
That is a story for another day. The plain fact before our eyes is that monetary data in the US and Europe are catching fire. If you can figure out what the convoluted consequences mean for asset prices, you are doing better than anybody at the IMF this year.