BitMEX Research recently published a blog post focusing on the U.S. economy and the delayed impact of higher interest rates. Despite a decline in U.S. inflation rates and a rise in interest rates to more traditional levels, the blog argues that the real consequences of these changes have yet to manifest.
The U.S. Return to “Normal” Rates
Starting in March 2022, the Federal Reserve initiated a series of interest rate hikes, taking rates from 0.25% to 5.5%. This led to 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 genuinely adapted 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 had been near zero for approximately 14 years following the 2008 global financial crisis. It goes on to say that this extended period of low rates was criticized for fostering economic addiction to 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. Banks like Silicon Valley Bank, Signature Bank, Silvergate Bank, and First Republic Bank were affected. It mentions that 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 to come. They argue that the lag between the rate hikes and their impact on the economy is longer than initially expected.
BitMEX’s blog post suggests that the lack of immediate impact might be psychological and points out 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 that demand for new loans has significantly declined, as shown in the July 2023 Federal Reserve Senior Loan Officer survey. This suggests that 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, it says, 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 apparently be around $1.5 trillion, posing a potential economic risk.
Prevailing Views and Conventional Wisdom
The blog post opposes the prevailing view that higher interest rates are working and that the economy will experience a “soft landing.” It argues that the real effects of the monetary tightening have not yet been felt but are inevitable.
BitMEX Research concludes that the U.S. economy is now in a waiting phase, anticipating the maturation of loans and the impact of reduced demand for new loans.
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