For more information see our Privacy Policy. Privacy Notice: Newsletters may contain info about charities, online ads, and content funded by outside parties. By the time unemployment starts rising, the recession will already be under way. Phase three, which has only just begun, is when the real economy will really start to hurt.
In phase two, attention has switched to banks caught out by the unexpectedly rapid rise in interest rates. Phase one of the unwinding of the bubble involved house, bond and share prices all suffering during 2022. So, predictably enough, asset prices were the first to suffer when the Fed began to tighten policy early last year. Asset prices – lubricated by vast amounts of cheap money from the Fed – boomed but the real economy did not. The “everything” bubble was not like that. The four previous bubbles had all come at the peak of business cycles, when the strength of the underlying economy provided some justification for the optimism in the financial markets. With some justification, it was dubbed the “ everything bubble”.įor students of economic history, there were distinct similarities between the frenzy as the American economy emerged from the Covid pandemic and previous bubbles: the buildup to the Wall Street crash of 1929, the Japanese equity and property boom of the late 1980s the dotcom implosion of 2000 and the global financial crisis of 2008. Shares, residential property, bonds, cryptocurrencies: all were part of a buying mania. At the tail end of 2021, asset prices were booming across the board in the US. To a large extent, it will be a recession of the central bank’s own making. The Fed will eventually cut interest rates aggressively but by then it will be too late to avoid a hard landing. Inflation will be squeezed out of the economy but at a heavy cost. Those institutions in better financial shape will limit the flow of new credit to firms and individuals. The longer rates stay high the tougher life gets for vulnerable banks. For that to happen, a lot more banks would need to start going bust. Jobs growth is slowing but that won’t be enough on its own to persuade the Fed to start cutting rates. Wall Street is expecting interest rates to start coming down in July and to be just over 4% by the end of 2023 but the markets are getting ahead of themselves. In the circumstances, it will be little short of miraculous if the Federal Reserve – the US central bank – manages to finesse a soft landing for the economy. Things could turn nasty very quickly, for the economy and for the president personally. If Biden is not worried about the implications of this for his re-election prospects in November 2024, then he should be. That has been followed by the most rapid increase in interest rates for four decades, which has taken official borrowing costs from near zero to more than 5% in little more than a year. The US has just witnessed one of the biggest bubbles of the past 100 years.
What is there to be worried about? It will be little short of miraculous if the Federal Reserve manages to finesse a soft landing for the economy The US will emerge relatively unscathed as it invariably does. Indeed, what’s surprising is how well the US economy is holding up. The spin is that none of what has happened thus far – least of all the collapse of a small number of regional US banks – should come as a surprise.
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