At their meetings in July, both the US Federal Reserve and the European Central Bank increased their key interest rates by 25 basis points. The financial markets had expected this in the run-up to the decisions. Subsequent press conferences, however, suffered a setback when Federal Reserve Bank Chairman Jerome Powell made it clear that the Federal Reserve intends to keep interest rates higher for a long time to bring inflation back to the levels of to bring back in 2019.
The market was expecting otherwise, as it has been speculating on rate cuts in the near future for some time. Behind this are two expectations or hopes. The first expectation is that the US Federal Reserve, which is committed not only to maintaining purchasing power but also to the development of the US economy, will not allow it to crash in a recession.
So far, however, this hope has not been consistent with Jerome Powell’s remarks, because in recent months he has left no doubt that the US Federal Reserve is willing to stall the economy if necessary in order to put a stop to high inflation. The second expectation of the financial markets is that debtors will not be able to pay the high interest rates in the long term.
Interest: The big danger – for everyone
Because the largest debtor is the state, the US Federal Reserve, which is dependent on the state, cannot leave interest rates at the current level forever, but will sooner or later be forced to lower them. So far, the stock market has clearly been betting on a quick and timely reduction in interest rates.
The argument cannot be dismissed out of hand, because if interest rates remain at the current level, the US government alone will have to spend over 200 billion US dollars more on interest payments within the next twelve months. The legitimate question is whether the American state can still afford its astronomical debts.
In the United States, outstanding national debt has grown from $370 billion in 1970 to $31 trillion. That growth rate is extreme, even when you factor in the increase in gross domestic product and tax revenue. The many debts for the American state were only affordable because the effective interest rate fell from 8.5 to 3.0 percent in the same period.
What is true of the American state is more or less true of all other states. At the current interest rates, they too cannot afford their high debt much longer.