“When that happens, the financial conditions index will go through the roof and at that point in time, inflation and growth rates will start disappearing and Federal Reserve will have no choice but to backpedal.”

Here’s the US and global FCIs. The global has already rocketed as EM asset volatility exploded:

Next up is the US FCI:

Note that once it starts, monetary tightening does not take long to send a financialised economy into a tailspin that exaggerates the tightening.

We saw this in the abortive tightening of 2015 and 2018.

It’s not a bubble waiting to burst, it’s the self-sustaining financialised economy that cannot endure higher interest rates.

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Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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