With “Whodunnit?” films and TV shows back in vogue, or at least plastered all over my social media incessantly, I think it’s time we solve a murder mystery of our own. Central bankers have been busy announcing themselves as the killers in order to bring down inflation. But who’s their victim going to be?

You might think it’s the economy. But GDP is a bit of a statistic. It doesn’t make for much of a plot.

Inflation is similar, even if central bankers are often announced as “slaying inflation”. And an end result of 2% per year is hardly killing it off…

No, I think it’s going to be something much more personal that drops dead. Perhaps much closer to home, too.

In terms of victims, I’m thinking of the likes of Northern Rock or Lehman Brothers. Perhaps sub-prime borrowers or first-time homebuyers.

But I just don’t know who it will be who is killed off in this episode of monetary policy.

One of the enduring lessons of history is that every interest rate hiking cycle features a death at some point. Because central bankers drive the economy by looking in the rear-view mirrors of inflation and unemployment, they always overdo tight monetary policy. They do this with higher interest rates and/or other measures until someone drops dead.

It could be by strangulation – borrowers unable to afford interest rates. They might be whacked on the head by the candlestick – traders get a margin call. Poison could be used – collateral shortages at pension funds. Or, if you’re looking for more of a Hollywood production, the murder weapon could be what Warren Buffett described as “financial weapons of mass destruction” – derivatives at an investment bank.

Whatever the murder weapon and the manner of death, you can be sure that someone will keel over at some point. It has been happening in financial markets for longer than at The Mousetrap. But I won’t go back that far.

Consider more recent history.

In 1987, the US ten-year Treasury yield spiked from 7% to over 10%. Then came the famous Black Monday, when stock tumbles set records.

In the 1990s, countries in Asia (mostly, but also elsewhere) had their crises each time rates rose.

In 2000, the bubble in technology, media and telecommunications (TMT – also called dotcom) stocks burst.

In 2008 it was sub-prime borrowers (and lenders) in the United States who suffered when rates increased.

2012 it was European governments.

We also had the taper tantrum of 2013 when monetary policy was tightened by the US Federal Reserve.

When US and Italian government bond interest rates spiked in early 2018 on mere speculation of monetary policy tightening, markets died of fright and it triggered a severe correction in stocks.

Well… interest rates have entered an upcycle once more.

I don’t know whether this will be the beginning of a new trend towards higher interest rates and bond yields, or just another blip on the 35-year downtrend. However, I do know the act featuring a death approaches.

Some people like to ask themselves the following: who is first to die in a world where debt is becoming more expensive?

Given the proven propensity of a crisis to occur while borrowing costs are rising, when interest rates begin their upcycle, you can scour the cast of characters to discover the source of the coming crash.

Is it American sub-prime borrowers, who borrowed more than they can afford based on rising house prices? Perhaps zombie companies, which borrowed too much when times were good and can’t afford their debt? Or tech stock-buying margin borrowers, who face margin calls from their lenders when stocks correct? Perhaps commercial property owners in the new age of working from home and avoiding shopping centres?

In mid-2018 it was the government of Turkey, which had borrowed too many US dollars. As The Telegraph’s Ambrose Evans-Pritchard wrote at the time, “Turkey is the first big victim of Fed tightening, but it won’t be the last”. Attention immediately turned to Spain, one of Turkey’s biggest lenders, Poland thanks to its external debts, and Italy because of its precarious banking sector and government financing.

Of course, Covid-19 has worsened the situation dramatically. It’s adding to debts, shrinking GDP and crushing the incomes needed to pay debts, all at the same time. It’s the perfect storm, to use another metaphor, but the full effect of Covid-19 is still highly uncertain.

The Financial Times reckons that Italy might be the “weakest link”. The government has too much debt.

Then there’s Japan’s recent instability. Its currency has plunged and only extraordinary monetary policy is keeping the bond market steady, by way of imposing a coma.

House prices in Australia, New Zealand and Sweden are plunging very fast now. We saw in 2008 weakness in residential real estate markets could produce systemic threats.

Perhaps we’ll experience an energy crisis. Or it may be that sacrificing Europe’s economy to save energy turns out to be a mistake as Europe’s energy intensive businesses go bust.

The financial institutions like banks and insurance companies holding government bonds that have been plunging in price, could get into trouble in the way that UK pension funds did last year.

Or the US dollar’s weaponisation could trigger its own demise as countries like Russia and China begin to away from using it on a large scale.

There’s no shortage of candidates that could be killed off in this cast of characters.

While it needn’t necessarily matter which specific part of the economy or financial market goes bust, it’s always fun to speculate.

That’s the nature of any good Whodunnit. At least we already have a pretty good idea of who the killer is…

Nick Hubble
Editor, Fortune & Freedom