Martin Wolf’s analysis clearly underscored the problems associated with Jay Powell’s approach of keeping interest rates artificially low (“reasons to worry about US inflation”, Notice, May 19).
But there may be a bigger question. With the surge in new non-government debt globally, the aging of this debt has big implications. If this aging spans five to ten years, then any decision by the Chairman of the Federal Reserve to raise short-term rates can be manageable. But if the debt is for one to three years, the increased negative impact will be significant. It will be impossible for many to roll over bonds maturing on similar and favorable terms. In addition, as higher interest charges affect earnings, the balance sheet implications of higher absolute debt could result in lower credit ratings.
The similarity with 1931 is striking. The Fed had artificially kept interest rates lower for many of the same reasons as they are today. Governments around the world were borrowing more and more to cover cash flow shortages. Debt to operating cash flow ratios were impossible to maintain. Then “the music stopped” and the result was not corrected until the Second World War!
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