Recent weeks and months have seen the onset of a global economic crisis due to many factors; Such as the Covid-19 virus, the Russo-Ukrainian war, and the unprecedented and rising global inflation, which led to strong economic measures affecting stock markets and large corporations.
In an article published by the American newspaper “New York Times”; Author Paul Krugman highlighted the rise in interest rates, and the subsequent decline in stocks, especially attractive stocks, such as Tesla, and noted that the cryptocurrency crash was really epic, and wondered; What happens?
He indicated that over the past ten years, or perhaps within 20 years; The Federal Reserve has kept interest rates artificially low, and these low rates have inflated economic bubbles everywhere; Where investors were looking for something that would fetch a suitable interest rate, but now the era of cheap money is over, and nothing will remain the same.
What does it mean to be “artificially” low interest?
The author explains that short-term interest rates are set by the US Federal Reserve, while long-term rates reflect expected short-term future rates.
The author points out, however, that nothing is so affected by politics as the interest rate; Something that economists have long called the “natural interest rate” is an interest rate that corresponds to price stability, not high enough to cause an economic depression, nor low enough to cause hyperinflation.
asks the author; Is the allegation that the Fed has consistently set interest rates below this normal rate; True assertion? Suppose that if so, where was the hyperinflation?
In fact, until 2021, he said, inflation was more or less constant at the Fed’s target of 2% per year.
Why was the natural interest rate so low?
The immediate answer, according to the author, is that the Fed has learned from experience, as it has had to keep interest rates low to prevent the economy from slipping into a recession.
But – says the author – if you think the Fed has set rates too low all along, you are actually saying that the Fed should have kept the economy in a recession to avoid “something”. Here the author points out that the usual interpretation is in line with these paths.
“Maybe the prices of goods and services did not rise, but look at all these asset bubbles,” he says, noting that there were indeed some large bubbles that occurred in the era of low interest rates, adding that there was the large property. bubble in the mid-2000s, paving the way for the global financial crisis.
The author recommends that if you want to claim that low interest rates were responsible for those bubbles, however, you should make peace with the fact that there were some impressive bubbles before rates fell, and note that interest rates have risen a lot in recent times few months.
Is the era of cheap money over?
To answer this question, you need to ask why did the Fed feel compelled to keep interest rates so low for so long?
The author goes on to say that the basic answer is that businesses have been consistently resisting since 2000 – and especially since the global financial crisis – to maintain the level of investment spending that has used all the money that property owners wanted to save.
He pointed out that this situation bears the name of “secular stagnation”; This is a case of little or no economic growth, which according to the author is unfortunate; Because it has been widely and misinterpreted as a confirmation of the meaning of slow growth, rather than low interest rates.
What causes this stagnation?
The best guess is that it has a lot to do with demographics.When the working-age population slowly grows or even shrinks; The need for “new offices”, “shopping centers” and even housing is declining, and so the demand is weakening, and these demographic forces will not disappear, but are likely to increase, partly due to the low immigration rate.
Therefore, according to the author, there are compelling reasons to believe that we will soon return to the era of low interest rates.
Why did prices rise?
The Fed is now raising interest rates to fight inflation, but it may be temporary, and as soon as inflation returns to 2% to 3% – which is likely to happen by the end of next year – the Fed will start cutting again, according to the author.
The author believes that long-term real interest rates – reflecting the expectations of future Fed policy – rose from their lowest levels during the pandemic, but it is still just about what it was in 2018-2019, that is, the market is actually bet that the era of cheap money will return.
The author concludes by asking if this means that there will be more bubbles in the future, and answers “yes”, but there will be more bubbles even if interest rates remain high.