Stubborn Inflation, High Interest Rates, and Debt: Echoes of Past Cycles Haunt Current Economy
Summary:
The Federal Reserve decided to maintain interest rates at the highest level since before the 2008 Global Financial Crisis. Persisting high inflation is causing financial uncertainty, prompting central banks to contemplate longer-lasting, higher rates. Today, comparisons are drawn to the '90s boom-and-bust cycle as interest rates soar, and the economy remains robust despite threats from high inflation and geopolitical tensions. Debt levels mirror those of 2001-07, heightening concerns reminiscent of 2008. Despite these challenges, cryptocurrency and other markets show optimism, predicting a strong bull market in the next couple of years.
In its recent November gathering, the United States Federal Reserve reached a decision to maintain interest rates, which currently stand at the highest they've been since before the global financial crisis of 2008-09. The Federal Funds rate clocks in at between 5.25 and 5.5%, mirroring the rate of the United Kingdom and outstripping the European Union's record-high rate of 4%. This high bar is largely attributed to stubbornly high inflation, which is causing concern in developed Western markets. Forecasts from figures like Citadel's Ken Griffin suggest inflation could remain for ten years or more, prompting central banks to grapple with the concept of longer-lasting, higher rates.
This proposed shift significantly deviates from the last 15 years' standard of remarkably low interest rates, supported by never-ending borrowing cycles at government, corporate, and personal levels. Consecutive money influxes allowed for a consistent rally following the global financial crisis and propped up equity markets throughout the worst global health crisis in over a century.
Understandably, this proposed change left investors worryingly pondering what the end of this regime might mean. The cycle of boom and bust is a common occurrence within capitalism, and it seems we are standing at the edge of a new cycle.
It is useful to trace back past 2008 to get a clearer grasp of the current scenario. From 1993 to 1995, U.S. interest rates shot up due to the flash crash of 1989, high inflation, and Middle East-related tensions exerting strain on the world's biggest economy. The Federal Reserve responded by lifting rates from 3% in 1993 to 6% by 1995.
This rise didn't hamper the U.S or its Western trading allies–on the contrary, it initiated an incredible growth period. From 1995 to 1999, the S&P 500's value more than tripled, and the NASDAQ composite index skyrocketed by 800%. During this time, globalization, innovation, and optimism gave birth to the Internet, now a vital component of our global economy and everyday lives. However, the dot.com bubble resulted in tremendous loss by October 2002, with NASDAQ surrendering all its gains.
Today, we also face intense inflation and interest rates as Europe and the Middle East witness mounting tensions. Yet, the economy is surprisingly robust despite the challenges posed by the Covid-19 pandemic. We can find echoes of the dot-com boom in today's crypto scene. The impending approval of one or more U.S. Bitcoin spot ETFs in January will flood this fairly nascent asset class with institutional funds. This could cause an explosive wave of IPO activity within and outside the industry, which could eventually burst just like in 1999.
In spite of these similarities with the '90s, one prevailing factor aligns us closer to the 2001-07 market cycle: debt. The reckless lending phase during these years had unprecedented consequences. Now, we are witnessing a striking semblance to 2008, with U.S household debt at a record high and rapidly rising credit card loan delinquency rates. Instead of implementing frugality, U.S consumers engaged in "revenge spending" after prolonged lockdowns, and this is having negative repercussions.
While this credit trend reversal might not trigger a worldwide banking collapse as in 2008, it's critical for the health of the mainly consumer-driven U.S economy. With high interest rates set to prevail, the mounting debt is bound to create pressure.
Furthermore, the $30 trillion debts accumulated by the U.S. government due to the pandemic cannot be ignored. This heretofore unprecedented scenario led to credit downgrades for the world's leading economy–an occurrence largely downplayed so far.
We're not facing an immediate "credit crunch" as in 2008. The U.S. economy–and especially the U.S. consumer–remains robust. Higher interest rates have not deterred property purchases, and spending remains high as wage increases outpace inflation.
The cryptocurrency market exhibits signs of optimism, particularly as it enters a new bull cycle. Investors are investing heavily in altcoins, sweeping away the memories of previous losses incurred by Terraform Labs, Three Arrows Capital, Celsius, and FTX. As such, a potent bull market is anticipated over the next one to two years until it loses steam. Meanwhile, the U.S consumers' soaring debt is a timebomb waiting to explode, especially if high interest rates endure.
The U.S. Treasury and Federal Reserve, key players in this cycle, have already demonstrated their willingness to revise the rules to ensure the banking system survives. As the situation oscillates, modifications are to be expected. Everything that ascends ultimately descends, and this principle applies here too. Lucas Kiely, Yield App's leading investment officer, oversees investment portfolio allocations and spearheads the introduction of a varied investment product range. He maintains this opinion independently, and it doesn't reflect or represent Cointelegraph's views and opinions.
Published At
11/13/2023 5:13:34 PM
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