Renowned economic historian and editor of Grant’s Interest Rate Observer, Jim Grant, has issued a warning about a potential disaster looming over the US economy. According to Grant, the previous decade of near-zero interest rates has created an “everything bubble” in stocks, real estate, and credit markets.
The consequences of rising interest rates, particularly in the credit markets, could be severe. Grant argues that corporations and individuals will struggle to manage their debt as borrowing costs increase. He points to the rise of “zombie companies” that have survived on cheap debt during the “free money” era but now face bankruptcy as interest rates go up.
The alarming trend of bankruptcies is already evident, with corporate bankruptcies reaching a record high in 2022. Grant is not the only finance expert expressing concern about the credit bubble. Mark Spitznagel, founder of Universa Investments, shares Grant’s worries and predicts that the bubble will eventually burst.
Looking ahead, Grant argues that interest rates may continue to rise for a generation based on historical trends. This could result in an era of low economic growth, high inflation, and high interest rates. However, there is a counterargument that technological progress, specifically in AI and robotics, could bring about deflation and offset the impact of rising interest rates.
Grant acknowledges the potential for technological progress to be deflationary but questions whether the current rate of progress is sufficient to significantly reduce prices. He emphasizes that historical patterns are not a guarantee of the future and that forecasters should proceed cautiously.
While the US economy faces potential risks, it is important to approach these predictions with a measured perspective. Only time will tell how the debt problem, rising interest rates, and technological advancements will shape the future economic landscape.
