With the deficit ballooning and rates rising a recurring topic is being discussed more and more often: The Debt Cycle.
The Debt Cycle is characterized by a period of lower rates which precipitate increased lending and use of credit throughout the economy. This monetary injection shoots an injection of growth as companies can borrow at minimal rates to repurchase stock and perpetuate a "wealth effect" or invest in growth initiatives. That growth spending combined with consumer spending increases economic activity and the velocity of money. Too much money printing and increased velocity of money leads to the final stage when investors are over-leveraged from phase 1 and 2 yet can no longer support their interest payments as rates rise, credit refinancing transactions have higher hurdle rates for approval and general economic activity declines.
At the end of the debt cycle loose monetary policy has considerably less of a direct correlation on impacting the economy. The past two times this century when interest rates hit zero, the central banks kicked into "quantitative easing," which is a fancy term for "buying assets." So what's next?
QE is no longer effective, asset prices are elevated and our political situation (tariffs) is increasing global tensions. If the economy continues to grow, the rate hikes will be less detrimental, and the cycle can last longer. But if the economy proves incapable of managing the rate hike headwinds, our next downturn can really cause tremendous pain. The wealth gap and political divide in America will prove to be nothing compared to the strife that comes with a lack of opportunities.
The Debt Cycle is characterized by a period of lower rates which precipitate increased lending and use of credit throughout the economy. This monetary injection shoots an injection of growth as companies can borrow at minimal rates to repurchase stock and perpetuate a "wealth effect" or invest in growth initiatives. That growth spending combined with consumer spending increases economic activity and the velocity of money. Too much money printing and increased velocity of money leads to the final stage when investors are over-leveraged from phase 1 and 2 yet can no longer support their interest payments as rates rise, credit refinancing transactions have higher hurdle rates for approval and general economic activity declines.
At the end of the debt cycle loose monetary policy has considerably less of a direct correlation on impacting the economy. The past two times this century when interest rates hit zero, the central banks kicked into "quantitative easing," which is a fancy term for "buying assets." So what's next?
QE is no longer effective, asset prices are elevated and our political situation (tariffs) is increasing global tensions. If the economy continues to grow, the rate hikes will be less detrimental, and the cycle can last longer. But if the economy proves incapable of managing the rate hike headwinds, our next downturn can really cause tremendous pain. The wealth gap and political divide in America will prove to be nothing compared to the strife that comes with a lack of opportunities.
Dan Shainberg
#DanShainberg
#RecessionResister
@DanShainberg
@DanShainberg
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