Niall Ferguson: four reasons to worry

Professor Niall Ferguson of Harvard University says he “was all but pelted with bread rolls” in 2006 for warning that the world could end up like Japan: “fending off deflation with monetary and fiscal expedients” amid stagnating growth. And given that he was right about the last crisis, it bodes ill that he now reckons “there is a lot about the present time that is reminiscent of those pre-crisis days”. Every asset class has soared. In most housing markets, inflation-adjusted home prices are above their pre-crisis highs. Meanwhile, shares in Facebook, Amazon, Netflix and Google are up between 30% and 60%; bitcoin has risen sevenfold in 2017.

There are now four main reasons to worry. First, “the monetary policy party is drawing to a close” as the US Federal Reserve and the Bank of England raise interest rates and global credit growth slows.

Second, “we are at a demographic inflection point” as “the ratio of workers to consumers has peaked”. Wages and inflation should therefore rise. Both of these trends “lead to the conclusion that the end of the 35-year bond bull market is nigh”. As a result, “bonds will sell off; long-term rates will rise”. If inflation doesn’t rise in tandem, however, “highly indebted entities” will face a nasty squeeze; he is concerned about China and Canada in this context.

Third, note too that “a networked world — whose biggest companies are dedicated to reducing the cost of everything — is structurally deflationary”. Finally, the vast supply of shale oil militates against an inflationary oil shock. No two crises are the same, but there will be another one for sure – and this time, says Ferguson, “mark my words”.

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