In November, the U.S. Federal Reserve decided to keep interest rates at their current level, but they are still at the highest level since the global financial crisis of 2008-2009. The Federal Funds rate now stands at 5.25-5.5%, comparable to the interest rate in the UK (5.25%) and the record high rate in the European uniоn (4%). High inflation remains a problem in developed Western countries, and some experts, including Ken Griffin of Citadel, predict that it may persist for a decade or even longer. This is causing central banks to consider the possibility of maintaining high rates for a longer period.
This is a significant deviation from the norm of the past 15 years, when ultra-low interest rates were sustained by a constant stream of loans at the level of governments, corporations, and individuals. Such a policy led to strong and uniform market growth after the global financial crisis and supported stock markets during the worst global health crisis of the last 100 years. Investors, understanding that the era of low rates is coming to an end, are concerned about possible consequences.
History shows that capitalism is a game of alternating rises and falls, and now we are at the beginning of a new cycle.
It is important to remember the period from 1993 to 1995 in the USA, when interest rates rose rapidly due to the financial crisis of 1989, high inflation, and tensions in the Middle East. In response, the Federal Reserve raised rates from 3% in 1993 to 6% by 1995. However, this did not prevent the growth of the US economy and its Western trading partners. From 1995 to 1999, the S&P 500 index grew more than threefold, and NASDAQ – by an amazing 800%. This period was a time of globalization, innovation, and optimism, which led to the creation of the Internet – the basis of the modern global economy and the life of every person on the planet. However, by October 2002, the dot-com bubble burst, and NASDAQ lost all its gains.
Today, we are also emerging from a difficult period of high inflation and high interest rates against the backdrop of growing tension in Europe and the Middle East. Nevertheless, the economy, despite all the problems since the COVID-19 pandemic, is showing amazing results. Parallels can be drawn between the dot-com boom and cryptocurrencies. In January, one or more American Bitcoin exchange-traded funds are likely to be approved, leading to an influx of huge volumes of institutional money into this relatively new asset class. This may trigger a wave of IPOs within and outside the industry, which, as in 1999, may ultimately end in a crash.
However, there is one important factor that brings us closer to the market cycle of 2001-2007: debt. As we all know, this period was one of the most reckless in the history of lending and trading based on this lending. And the result changed the world. Today we see alarming signs of 2008, as household debt in the US reaches a record level, and delinquencies on credit card payments are growing at the fastest pace since 1991. Instead of tightening their belts, American consumers have chosen so-called “revenge spending” after being locked up in their homes for almost two years, and this is putting pressure.
The reversal of this credit trend may not lead to the collapse of the global banking system, as it was in 2008, but it is important for the health of the American economy, which is currently supported by American consumers.
And the longer interest rates remain high, the more pressure will build up as debts grow.
And, of course, one cannot fail to mention the “ten-ton elephant in the room”: not only are American consumers accumulating debts. Due to the pandemic, the US government debt now exceeds $30 trillion. This previously unthinkable situation led to the downgrade of the credit rating of the world’s largest economy, but so far everyone is dismissing it as a minor problem.
Nevertheless, we have not yet reached the breaking point of the “credit crisis” of 2008. Despite activity in the bond market, the American economy remains stable, especially the American consumer. High interest rates do not deter people from buying real estate, and no one seems interested in reducing spending, as salaries are still growing faster than inflation.
There is also some optimism in the markets, especially in the cryptocurrency market, which has already begun its next bull cycle, as investors shed the ghosts of Terraform Labs, Three Arrows Capital, Celsius, and FTX, investing in altcoins. Thus, there is a chance that we will experience an extremely strong bull market over the next year or two, until the steam runs out, as it always does. Ultimately, the huge pile of American consumer debt will collapse, especially if interest rates remain high for a longer period.
The most important players in this cycle will be the US Treasury and the Federal Reserve System. As we saw in March 2023, they are ready to rewrite the rules to ensure the survival of the banking system. As the situation fluctuates, goals may change. But what goes up must come down. We can be sure of that.
Translated and adapted from Cointelegraph.
