Illustration: Aïda Amer/Axios
"Over the last year, the world's major central banks have tightened their policies more rapidly than has been seen in decades, ending an era of ultra-low interest rates that had become a basic assumption across global commerce and finance.
- We are now in the early stages of a slow-moving process of markets, companies and governments adapting and readjusting to that reality.
Why it matters: Events like the failure of Silicon Valley Bank in March and the debt and currency market freakout over a British fiscal plan last fall are not so much isolated blowups, but early examples of what could be a rolling series of mini-crises in the coming months and years.
- So far, those mini-crises have been well-contained. Last fall, the British government reversed course and the Bank of England intervened to prevent a collapse of pension funds. The American authorities last month protected depositors in SVB and Signature Bank, quelling the storm.
- But
as the world adjusts to an era in which money isn't free anymore, it's
hard to imagine there will not be bumps along the way, though even
well-informed policymakers are modest about their ability to predict
where and when they will occur. . .
- Banks may soon face big losses on commercial real estate loans as low-rate debt matures and must be rolled over into higher-rate debt — alongside a loss in rent revenue in office buildings due to the work-from-home shift.
- The U.S. government is now forecast to run budget deficits of about 6% of GDP over the next decade, a level that historically only occurred in wars or recessions.
- Higher rates and/or a debt ceiling blowup could create urgency around deficit reduction. The latter could cause a crisis in the Treasury bond market.
The bottom line: There is plenty of reason to think that ripples from higher rates will not cause the kinds of financial catastrophe seen in 2008; the damage could and should be much more contained. The U.S. economy may well escape a recession entirely.
- At the same time, it is hard to imagine that we've seen the end of the disruption caused by such a massive shift in the cost of money."
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