It is possible to make an apparently minor precision but, in my opinion, key: it is not the same to say “we are reaching the top” to think that “we are close to the peak”. The latter assumes that rates can drop as fast as they went up, restoring the financial boom after a difficult 2022. In the opinion of this writer, neither likely nor desirable. In fact, from a fundamental perspective, it would be terribly worrisome.
Like any other price, the price of money (which is the interest rate) is determined by supply and demand. Since 2008 there has been a substantial increase in that, motivated by the large central banks of the planet in response to the risks generated by the global financial crisis. It was equivalent to an urgent dose of morphine to mitigate the impact of a major adverse shock. The pandemic required a new dose.
Said treatment was facilitated by the absence of inflation. That of the United States averages 1.6% at an annual rate between 2009 and 2019. I think we will hardly see those levels in the near future. They are largely explained by the emergence of China as the world’s factory (consumer durables inflation in the United States, which better reflects this effect, averages -0.5% during 2009-2019). Post-COVID, it is difficult to expect a similar path for the Asian giant, as it faces major challenges. The most important? Overcome the so-called “middle class trap” – maintain high growth rates when the country enters that category in terms of per capita income. But that is another story.
More than a peak, it seems then that we are approaching a plateau, with a modest slope. I insist that it is not necessarily bad news.
The travails of Western economies have to do largely with a problem of productivity. If this is low, profitability is minimal and, therefore, there are no incentives to invest. However, since the risk-free rate has remained close to zero, even the least profitable projects – or those that do not make sense – can obtain resources. The purification necessary to recover productivity and channel resources to productive capital does not materialize. Too much morphine hinders the diagnosis.