{"id":14000,"date":"2025-07-16T11:24:17","date_gmt":"2025-07-16T11:24:17","guid":{"rendered":"https:\/\/www.newsbeep.com\/us\/14000\/"},"modified":"2025-07-16T11:24:17","modified_gmt":"2025-07-16T11:24:17","slug":"fire-is-now-the-greater-threat-to-investors-than-ice","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/us\/14000\/","title":{"rendered":"\u2018Fire\u2019 is now the greater threat to investors than \u2018ice\u2019"},"content":{"rendered":"

Unlock the Editor\u2019s Digest for free<\/p>\n

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.<\/p>\n

The writer is a philanthropist, private investor and co-founder of Pimco<\/p>\n

Some say the world will end in fire,
Some say in ice.
\u2014 Robert Frost<\/p>\n

The American poet Robert Frost once wrote of the world\u2019s potential destruction by fire (desire) or ice (hate). While obviously not meant as a reference to markets and economies, it could describe the opposing menaces of inflation (fire) and deflation (ice) that have loomed over them in the past century.<\/p>\n

The 1930s Great Depression showed the economic devastation wrought by deflationary ice, produced in this case by a combination of misguided fiscal and monetary policies. Franklin D Roosevelt fought it with the New Deal until the second world war finally brought a resurgence of inflationary fire. <\/p>\n

A host of battles followed between the menaces and attempts to counter them, the next being the early 1970s after the elimination of the gold standard. This made monetary policy a much more significant weapon to control the firestarter of Opec\u2019s oil price shock, and Paul Volcker became the first monetary policy iceman as Federal Reserve chair. But economic breakdowns during the 2008-9 Great Financial Crisis and the pandemic years of the early 2020s required policymakers to instead fight the spread of ice.<\/p>\n

My point from this history is that our finance-based economy has been in a long-term fight to produce stability in the midst of destructive forces, some brought about by Keynesian attempts by governments to stimulate demand, others more influenced by the fragility of credit creation first explained by Hyman Minsky in the early 1980s. <\/p>\n

Current growth in government debt \u2014 a source of much market concern \u2014 is inflationary in the long term, but nothing is new about it except its seemingly unstoppable growth rate. We are still experiencing a Robert Frost-like juxtaposition of fire and ice.<\/p>\n

Into the mix have come new forms of lighter fluid that have influenced credit creation over the past decade, such as an array of \u201cshadow banking\u201d platforms. The excess liquidity in the system engendered by the Fed has been clear to see in spates of crypto speculation, esoteric ETF launches, meme-based investing and the NFT mania. In addition, it must be acknowledged that recent tariff rises and President Donald Trump\u2019s \u201cbig, beautiful bill\u201d also have potential to add to the fire. <\/p>\n

As a deflationary counter, though, China\u2019s struggle to reinflate its economy with bold measures demonstrates the ever-present possibility of ice and the difficulty of generating growth.<\/p>\n

In my mind, there\u2019s only a slight doubt that financial markets will be closer in the future to a singe than a freeze. Finance-based capitalism, alongside the neglect of big governments of the inflationary consequences of the growth rate of debt, tilt the long-term odds in favour of fire. Financial markets should be alert to the prospect of increasing interest rates that counter the rise of AI and its assumed boost to productivity.<\/p>\n

But pinpointing 10-year Treasury rates, or even forecasting a range for them on the basis of increased supply, can be a mug\u2019s game in the short run. Ten-year yields have declined over the past six months even with the expectation of Trump\u2019s BBB, for instance. <\/p>\n

Some calculations can be made, such as determining the R-star, the level of interest rates that has a neutral impact on the economy, and then adding a premium for holding a Treasury bond over 10 years. When added to the current US consumer price inflation of 2.4 per cent, that produces a 10-year rate of 4.25 per cent \u2014 only a little below where we are now. <\/p>\n

Recommended<\/p>\n

\"Dutch<\/a><\/p>\n

But when observing how yields on 30-year bonds have become more volatile versus those on five and 10 years, the situation is far from calm. Spreads between yields on long- and short-dated\u00a0bonds are at cyclical highs and moving higher.<\/p>\n

And in the intermediate to long term, more supply requires more buying. And dollar weakness and geopolitical\/tariff unrest raises the likelihood of higher inflation \u2014 perhaps to 3 per cent and higher. These forces likely lead to increasing premiums for holding longer-term paper.<\/p>\n

Even with the 30-year yield at 4.9 per cent \u2014 some 0.9 percentage points above its 12-month lows \u2014 long-term bonds remain risky because of the high sensitivity of their prices to small changes in interest rates. A 0.2 percentage point rise in yields \u2014 which pushes Treasury prices down \u2014 would wipe out the annual return an investor can expect to make from coupon payments. That\u2019s not a bonfire but the heat is above normal.\u00a0<\/p>\n

Fire has of course been what Robert Frost suspected all along. \u201cFrom what I\u2019ve tasted of desire,\u201d he concluded, \u201cI hold with those who favour fire.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"Unlock the Editor\u2019s Digest for free Roula Khalaf, Editor of the FT, selects her favourite stories in this…\n","protected":false},"author":2,"featured_media":14001,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[37],"tags":[28,112],"class_list":{"0":"post-14000","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-markets","8":"tag-business","9":"tag-markets"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/14000","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/comments?post=14000"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/14000\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media\/14001"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media?parent=14000"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/categories?post=14000"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/tags?post=14000"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}