Introduction
In a recent blog post, BitMEX Research discusses the U.S. economy and the delayed consequences of higher interest rates. Despite a decrease in inflation rates and a return to more traditional interest levels, the blog argues that the true effects of these changes have yet to emerge.
The U.S. Return to “Normal” Rates
Starting in March 2022, the Federal Reserve began raising interest rates, bringing them from 0.25% to 5.5%. This resulted in a reduction in the U.S. inflation rate from a peak of 9.1% in June 2022 to 3.0% by June 2023. The blog questions whether the U.S. economy has truly adjusted to these higher rates or if the real impact is still on the horizon.
Criticisms of Near-Zero Rates
The blog post recalls that interest rates remained near zero for about 14 years following the global financial crisis in 2008. It goes on to mention that this prolonged period of low rates was criticized for fostering dependence on low rates and encouraging unsustainable levels of debt.
The 2023 U.S. Banking Crisis
BitMEX Research discusses a banking crisis that occurred in the U.S. at the beginning of 2023, affecting banks such as Silicon Valley Bank, Signature Bank, Silvergate Bank, and First Republic Bank. The crisis was attributed to years of low interest rates and subsequent aggressive rate increases, with “Operation Chokepoint 2.0” also playing a role.
The Lagging Impact
Despite the absence of immediate catastrophic effects from the rate hikes, BitMEX Research maintains that the negative consequences are still yet to come. They argue that the lag between the rate hikes and their impact on the economy is longer than initially expected.
Psychological Factors
The blog post suggests that the lack of immediate impact might be psychological, noting that many market participants, especially those born after 1986, have only experienced low rates and may find it difficult to adjust to the new financial landscape.
New Loan Data as of July 2023
BitMEX Research highlights a significant decline in demand for new loans, as shown in the July 2023 Federal Reserve Senior Loan Officer survey. This suggests an eventual credit contraction is inevitable.
Money Supply Contraction
The blog post provides specific figures indicating a contraction in the U.S. money supply. M1 declined by 10.6%, and M2 also showed a decrease. This marks the first decline in M2 since 1949, indicating a significant tightening in financial conditions.
U.S. Government Debt Concerns
BitMEX Research points out that the current U.S. government debt stands at $32.3 trillion. If all this debt were to be refinanced at the current 10-year treasury yield of 4.5%, the annual interest cost would be around $1.5 trillion, posing a potential economic risk.
Prevailing Views and Conventional Wisdom
The blog post challenges the prevailing view that higher interest rates are effective and that the economy will experience a “soft landing.” It argues that the true effects of monetary tightening have not yet been felt but are inevitable.
Waiting Game
BitMEX Research concludes that the U.S. economy is currently in a waiting phase, anticipating the maturity of loans and the impact of reduced demand for new loans.
Hot Take: The Lingering Impact of Higher Interest Rates on the U.S. Economy
The BitMEX Research blog post raises concerns about the delayed consequences of higher interest rates on the U.S. economy. While inflation rates have decreased and interest rates have returned to more traditional levels, the true effects of these changes have yet to manifest. The blog highlights the psychological factors at play, such as market participants’ difficulty in adjusting to a new financial landscape. With declining demand for new loans and a contraction in the money supply, BitMEX Research warns that negative consequences are still on the horizon. It challenges prevailing views and emphasizes the need to wait and observe the impact of these changes on the economy.
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