BY GUY CARSON
In 1964, Bob Dylan declared “The times they are a changin’.” It’s a statement that can be applied consistently across the course of recent human history to describe a multitude of events and circumstances. Amongst these is the recent state of monetary policy globally.
Since the Global Financial Crisis in 2008, central banks have branched in experimental policies such as Zero Interest Rate Policy (“ZIRP”) and Quantitative Easing (“QE”). These policies were put in place to drag the economy out of a financial crisis. Ever since then, economists have speculated on when policy will be normalised.
The problem though is the definition of normalisation. Most people believe that “normal” interest rates are higher than today, however a cursory glance at the recent history suggests a different story. Interest rates have steadily declined for over 30 years with a few notable exceptions. The exceptions are the late 1980s, 1994, 2000 and 2005-07. Three of those four tightening cycles ended in recession.
This brings us to the present day, hopes of normalisation have once again been put aside. The Federal Reserve is well aware of recent history and the circumstances it currently faces. Debt has been in a super cycle since the 1980s as rates have come down. The last decade of ZIRP has enabled this trend to continue. High household debt was one of the key factors behind the GFC and whilst households have delevered slightly, corporates (as well as the government) have taken up the reins.
Late last year, the Federal Reserve reached a tipping point and the corporate debt market started to seize up. The Fed paused and is now set to embark on rate cuts.
Due to high debt levels, Interest rates are likely to fall and stay at around zero for the foreseeable future. As a result, investors will need to think differently about the world. If you wish to have a conversation about how Southpac can help you, please reach out.
For further information please contact Guy Carson at [email protected].
Disclaimer: The above contains the opinion of the author and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice