Especially at a time that US Treasury bond yields are rising sharply, it is surprising that your editorial (FT View, March 9) is silent about the serious financial market risks associated with the bold Biden budget experiment.
The truth of the matter is that the Biden fiscal stimulus is occurring in the context of a global asset price and credit market bubble.
It is not simply that today’s US equity valuations are at lofty levels last seen on the eve of the 1929 stock market crash. It is also that very risky borrowers, especially in the highly leveraged loan market and in the emerging markets economies, can raise money at interest rates not much higher than those at which the US government can borrow.
Today’s bubble is premised on the assumption that US interest rates will remain indefinitely at their current ultra-low levels. A real risk of the massive Biden fiscal stimulus is that it could invite a return of the bond market vigilantes at the first whiff of higher inflation, especially if they perceive the Federal Reserve to be in inflation denial.
As in the past, rising interest rates could prove again to be the trigger for a financially disruptive bursting of the bubble. The Biden stimulus would seem to risk acquiring public infamy more from the possible bursting of today’s “global everything” bubble rather from the risk of a sustained period of higher inflation.
Desmond Lachman
American Enterprise Institute
Washington, DC, US
