Economic stability or defending dollar? US Fed has a tough task
finance, the delicate balance between interest rates, economic growth, and global currency dynamics often holds the key to stability or turmoil. Lately, an intriguing scenario has been playing out in the United States, with far-reaching implications for the country's financial markets and the global economy.
When nominal interest rates, such as those on government bonds, exceed the nominal growth rate of a country's economy, it triggers a cascade of economic consequences. Here are some of the key repercussions:
- Government Debt Burden: As the cost of financing government debt outpaces economic growth, the government's debt burden continues to rise.
- Corporate Challenges: High interest rates put pressure on firms, making it difficult for them to service their debt.
- Household Struggles: Higher interest costs relative to wage growth make it challenging for households to service their debts, potentially undermining consumer spending.
- Asset Value Impact: Increasing the risk-free interest rate reduces the nominal value of assets, affecting financial markets. Real assets financed with short-duration or floating-rate loans are particularly vulnerable.
- Banking Sector Woes: Banks face higher deposit costs, and those with asset-liability mismatches may find their borrowing costs surpassing earnings on their investment portfolios.
- Rising Risk Aversion: Investors become more risk-averse as risk premiums rise, which tightens the cost of funds in financial markets.
These consequences can ultimately lead to economic slowdowns and pose a significant risk to the stability of the financial system.
For decades, the US dollar has held a unique position as the world's primary reserve currency. Central banks worldwide have
