Of Two Minds: The New Normal: Death Spirals and Speculative Frenzies
Most market commentary is focused on either a “hard” landing or a “soft” landing for the economy. Either way, it means the Federal Reserve is using higher interest rates to engineer a slowdown.
The problem is that the economy is far too complex of a machine. We saw with the pandemic that it can’t be switched totally off, nor would we want it to. And trying to pause it can lead to unintended consequences that can last for years.
The biggest challenge today is the world’s massive use of credit and debt. The U.S. government routinely borrows more than $1 trillion than it brings in every year. That doesn’t even include state or municipal debt.
That money is mostly financed at short-term rates. When interest rates were set at zero by the Fed, the cost was nominal. With interest rates closing in on 5 percent, their highest level in over 15 years, the cost to finance existing debt is on track to explode higher.
Adding in corporate and consumer debt, and it’s likely that significant spending will have to be curtailed to finance existing debt obligations.
That points not to just a hard landing, but potentially years of slow, or even zero economic growth. It also means that capital that would have gone into innovative new technologies will be lacking, curtailing future growth.