Investment firms issue alarm, predicting a severe financial catastrophe akin to one witnessed in several decades.
Is the world hurtling towards disaster? One of the world's most massive hedge funds is shouting the alarm.
Economic turmoil is brewing, and the storm might be bigger than any we've seen since World War II, warns Elliott Management—one of the world’s biggest investment firms managing nearly $56 billion in assets. As reported by Financial Times and Fortune, this financial institution claims that a unique and unprecedented series of economic conditions are driving us towards a crisis even worse than past stock market crashes or energy shocks over the past seventy years.
But this impending disaster isn't a foregone conclusion, they caution. Economic slowdown in the coming year seems increasingly likely due to aggressive interest rate hikes by central banks, including the Federal Reserve, in response to surging inflation. These actions, as predicted by international organizations like the World Bank and United Nations, could trigger a global recession. However, the situation could be far worse, claims Elliott, who asserts that central banks were responsible for the inflation crisis to begin with, as they eased monetary policy during the early stages of the COVID-19 pandemic. If central banks don't act swiftly, the mess we're in could lead to "global societal collapse" and "international or civil unrest," they warn.
Central banks in the crosshairs
In its letter to clients, Elliott Management accused political leaders of being deceitful about the causes of rising inflation and failing to accept their share of responsibility for its creation. Central banks, including the Fed, Bank of England, and European Central Bank, slashed their interest rates to record lows near zero at the start of the pandemic to jumpstart growth following a decade of interest rates already at unprecedented lows after the 2008 financial crisis.
This ultra-loose monetary policy helped counterbalance the economic strain caused by lockdowns and business closures. Yet, interest rates remaining too low for too long carry their own set of risks by fueling excessive growth and unchecked inflation. In fact, according to Elliott's predictions, this extended period of low-interest rates could steer the global economy towards "hyperinflation"—an inflation rate that, if above 50% monthly, is rapid, self-sustaining, and largely uncontrollable. Hyperinflation is rare worldwide, as a monthly inflation rate of 50% would correspond to an annual rate of 12,875%, far above the current US annual inflation rate of 8.2%.
Prominent economists like Mohamed El-Erian have criticized the Federal Reserve for keeping interest rates too low for too long. Low-interest rates were useful initially, El-Erian argues, but by mid-2021, they posed increasing threats to the economy by stirring inflation, stifling growth, and destabilizing the financial markets. Even former Treasury Secretary Larry Summers has warned that the Fed's monetary policy could be sparking "dangerous complacency" regarding inflation due to near-decade-long low-interest rates. Both El-Erian and Summers caution that unchecked inflation could compel the Fed to abruptly tighten monetary policy, damaging the already fragile economy.
Sources: Financial Times, Fortune.
- Elliott Management, a giant in the global finance realm, has cautioned that the world might be heading towards a recession, larger than any seen since the post-World War II era.
- Accused of deceit regarding the causes of rising inflation, Elliott Management asserted that central banks, including the Federal Reserve, Bank of England, and European Central Bank, played a significant role in creating this crisis.
- Elliott Management warned that the persistently low-interest rates implemented by these central banks could lead the global economy towards hyperinflation, a self-sustaining, and largely uncontrollable inflation rate.
- If left unchecked, hyperinflation could force central banks into abruptly tightening monetary policy, potentially causing further economic damage.
- Economic analysts like Mohamed El-Erian and Larry Summers have echoed concerns about the Federal Reserve's extended low-interest rates, warning of the risks they pose to the economy and financial markets.
