The era of low interest rates and “easy money” is over, despite the dominant narrative in the international financial press of a new round of monetary policy easing that will return economies to pre-pandemic health crisis status and the prophecies of monetary policy makers policy that set the benchmark for monetary policy easing next June and herald a round of interest rate cuts within 2024.
Skyrocketing debt and geopolitical developments and ongoing trade wars will not lead to a de-escalation of price pressures as geopolitical developments and the de-dollarization being attempted by a number of countries in terms of international trade will result in rearranging supply chains and increasing producer costs – with all the risks of a supply shock either from geopolitical developments (the Houthi attacks in the Red Sea) or from unforeseen events such as climate change that particularly affects food inflation or from stupid tariff policies that will lead to trade wars.
The over-indebtedness that the policy of low interest rates has led to by over-leveraging values as in the case of the real estate market will play an important role.
The news that the US will add 1 trillion $ debt every 100 days while global debt increased by 7 trillion. dollars in 2023 show the paradigm shift to which economic policy must be driven in order to deal with the changing economic cycle.
The Federal Reserve is being urged by politicians – mainly Democrats – to even raise its 2% inflation target while the ECB is under pressure from the election cycle.
Defense spending
At the same time, the jump in defense spending does not leave much room for social transfers, which will put a suffocating pressure on governments.
In the US under the federal government’s $7.3 trillion budget for fiscal year 2025., defense spending once again set a record, reaching $895.2 billion, an increase of more than $9 billion compared to the economic year 2024, almost reaching the $900 billion mark.
US defense spending for fiscal year 2024 has already exceeded the combined military spending of the next nine countries, including China and Russia, which account for about 40% of global military spending.
With the US public debt topping $34 trillion in early 2024, equivalent to a debt of $100,000 per capita, the US still has 12% of its government spending on defense for fiscal year 2025 – if we add in that and interest rate solutions, we understand the magnitude of the fiscal impasse for the financial superpower.
In Europe, the budget impasse is evident as NATO members must find an extra €56 billion a year to meet the alliance’s defense spending target, but the deficit has halved over the past decade, according to research by the German Institute Ifo.
The survey showed that many of the EU states with the biggest deficits towards NATO’s defense spending target of 2% of GDP – including Italy, Spain and Belgium – also have among the highest levels of debt. and fiscal deficits in Europe.
The return of protectionism
In the context of the de-globalization process triggered by Russia’s military operation in Ukraine, we have a revival of protectionism.
Both President Joe Biden and his predecessor and rival Donald Trump risk sending US debt levels into dangerous territory as Washington fails to grasp that the era of ultra-low interest rates will not return.
While the exact “ceiling” for the federal debt cannot be known — it is estimated by the Congressional Budget Office to rise to 116% of US gross domestic product by 2034 from 99% today.
Escalating the debt burden will create volatility in inflation and interest rates and encourage policy pressures on the Federal Reserve.
CBO’s current projections also leave “a lot of room for accidents” that increase the debt.
Both candidates may favor policies that will drive borrowing higher.
In the post-global financial crisis era, ultra-low interest rates have helped limit the impact of US deficits. But the post-pandemic period is different. The real benchmark rate is more likely to be 1.5% to 2% than 0%.
The most recent forecasts by Fed policymakers suggest a real, or inflation-adjusted, policy rate of 0.5%.
Trump has imposed tariff increases on China as well as US allies during his time in office. Biden has maintained China’s higher tariffs and its clean energy legislation as highly protectionist in its preference for US-made products.
