In a recent Bloomberg article, a group of economists voiced their fears that the Federal Reserve’s inflation fight may create an unnecessarily deep downturn. However, the Federal Reserve does not create a downturn due to rate hikes; it creates the foundations of a crisis by unnecessarily lowering rates to negative territory and aggressively increasing its balance sheet. It is the malinvestment and excessive risk-taking fuelled by cheap money that lead to a recession.

Those same economists probably saw no risk in negative rates and massive money printing. It is profoundly concerning to see that experts who remained quiet as the world accumulated $17 trillion in negative yielding bonds and central banks’ balance sheets soared to more than $20 trillion now complain that rate hikes may create a debt crisis. The debt crisis, like all market imbalances, was created when central banks led investors to believe that a negative yielding bond was a worthwhile investment because the price would rise and compensate for the loss of yield. A good old bubble.

Why are market participants scared of a strong dollar? Because for years there was a massive carry trade against the US dollar, predicated on a bet that constantly printing currency and cutting rates would never create inflation. The world got used to betting on one thing -massive money supply growth- and the opposite -weak inflation-. Cheap money became expensive, as I explained in my book, Escape from The Central Bank Trap.

The US dollar is not strong. The loss of purchasing power of the greenback is the largest of the past three decades. The US dollar is only “strong” in relative terms against other currencies that are collapsing in a global currency debasement that comes after years of monetary excess.

The main issue in the economy is that there are two generations of market participants who have only witnessed expansionary policies. That is why the most pressing question for investors is not where earnings are headed or what the rate of change in economic growth is, but when central banks will pivot.

The Federal Reserve and other big central banks have caused a massive crisis. On the one hand, major central banks’ balance sheets have stayed intact in local currency in 2022, and the path of rate hikes is quite accommodating. Markets, on the other hand, are collapsing. How is this possible? Because central banks believe their actions carry no consequences as there is a legion of economists that twist facts to say there is no problem. However, the contrary is true. Markets and politicians are so accustomed to easy money that even the slightest normalization causes havoc around the world.

For the first time in decades, central banks are tightening their monetary policy while governments continue to spend money as if nothing has changed. Large enterprises are not harmed by the most recent rate increases as long as credit conditions are still lax. However, households and small enterprises are bearing the full weight of the financial squeeze.

The current level of mortgage rates in the US is the highest since 2008. According to Reuters, the average interest rate for a 30-year mortgage hit 6.02% last week.