all but given up on its promise to peg ten-year borrowing costs at 1%. Some people, including Janet Yellen, America’s treasury secretary, say these higher interest rates are a good thing—a reflection of a world economy in the rudest of health. In fact, they are a source of danger.
Because higher rates are likely to persist, today’s economic policies will fail and so will the growth they have fostered. To see why today’s benign conditions cannot continue, consider one reason why America’s economy in particular has fared better than expected. Its consumers have been spending the cash they accumulated during the pandemic from handouts and staying at home.
Those excess savings were expected to have been depleted by now. But recent data suggest households still have $1trn left, which explains why they can get away with saving less out of their incomes than at any point in the 2010s. When those excess savings buffers have been run down, high interest rates will start to bite, forcing consumers to spend less freely.
And, as our Briefing explains, trouble will start to emerge across the world economy if rates stay higher for longer. In Europe and America business bankruptcies are already rising; even companies that locked in low rates by issuing long-term debt will in time have to face higher financing costs. House prices will fall, at least in inflation-adjusted terms, as they respond to dearer mortgages.
And banks holding long-term securities—which have been supported by short-term loans, including from the Fed—will have to raise capital or merge to plug the holes blown in their balance-sheets by higher rates. Fiscal largesse has added to the world economy’s sugar rush. In a higher-for-longer world, it too looks unsustainable.
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