Financial uncertainty, the boogeyman of stable markets, is at its apex. As a result, we have 40-year highs in inflation, rising interest rates and a massive diminution of financial markets, all playing out against a backdrop of global upheaval and geopolitical mischief. When it comes to your money, consider the facts and, as the knight said to Indiana Jones, “Choose wisely.”
1. Inflation — Inflation has risen from 1.4 percent to 8.3 percent since 2020, rapidly gnawing away at the purchasing power of salaries and the expected size of retirees’ nest eggs. Inflation affects every aspect of our financial lives.
2. Interest Rates — They have risen substantially over the last year, largely in reaction to actions by the Federal Reserve after it worked to keep them artificially depressed for more than a decade. The two-year Treasury has risen from .27 percent to 4.33 percent in one year as the yield curve has inverted with two-year Treasury notes yielding more than 10-years, suggesting a lack of confidence in our economic futures.
The average 30-year fixed rate mortgage has ballooned from historic lows below 2 percent to more than 6 percent, while the prime rate, the banking benchmark for pricing short and intermediate debt, has risen from 3.25 percent to 6.25 percent. Consumers’ buying power is shrinking, the national debt is growing and business costs are increasing. Widespread layoffs will follow.
3. The Cost of U.S. Debt —The interest on the country’s whopping $31 trillion national debt has hit $1.06 trillion on an annualized basis. That is equivalent to two-thirds of the value of all goods and services produced and incomes earned in Russia.
Note to Congress: Infinity is not a realistic debt ceiling. We will get away with skating on a sheet of ice that is one crack away from collapsing for only so long as other countries continue to be more fiscally reckless.
4. The United Kingdom — The confusing strategies of “on again, off again” tax reductions and increasing interest rates, coupled with an unalterable forced march toward clean energy have exposed a decade or more of fiscal irresponsibility in the UK. The pound lost 17 percent of its value against the dollar before recovering slightly, reducing U.K. buying power.
5. The European Union — The inflation rate in the EU is nearing 10 percent as the exchange rate between the euro and dollar has reached 1:1. Deloitte concluded in August 2022 that “disruptions caused by the ongoing war in Ukraine, surging energy prices, persistently high inflation, and the looming risk of Russia cutting off gas supplies in the winter months” have put the economy under an “unprecedented level of stress.”
6. Russia — Russia is creating a lot of uncertainty that makes predicting our financial future very difficult. Will it deploy tactical nuclear weapons as a part of Russian President Vladimir Putin’s “special military operation”? Or will the mothers and wives who are losing sons and husbands to the war further galvanize the country against the war effort? The global discomfort created by the reactions of a man ensnared by his own miscalculations is casting a long shadow on world economies.
7. China — China’s export boom has decelerated, inflation has risen, growth has slowed and the government’s zero-tolerance approach to COVID-19 has had a negative economic impact. As inflation hampers economies around the world, orders for Chinese goods are slowing.
The financial problems that the giant real estate company Evergrande has had are emblematic of an over-levered real estate sector that is now feeling the pinch. As one of the top three trading partners of the United States, what is economically bad for China can have an adverse impact on the U.S.
8. The dollar — The dollar’s rise this year is being fueled by interest rate increases by the Fed, which is sucking money out of other markets to higher-yielding U.S. assets, making it more difficult for countries to satisfy their dollar denominated debts.
But as the yuan heads for its largest annual loss against the dollar since 1994, China has reportedly told state-owned banks to prepare to sell dollars and buy the yuan. It has already introduced a central bank digital yuan and is encouraging countries like Saudi Arabia to accept payment for oil exports in yuan rather than dollars. The dollar will not remain this strong forever, and these actions, which are meant to shake its prominence as the global reserve currency and monetary value of choice in commercial transactions, will have long-term financial and political impacts.
9. Energy — As important as carbon reduction is, political efforts around the world to achieve immediate results without thoughtful economic bridges from a carbon-based to green world are distorting markets and adding volatility. The U.K., for example, has announced a range of measures, including a future ban on internal-combustion-engine cars and mandates requiring citizens to purchase efficient heat pumps that will impose extraordinary costs on ordinary consumers.
In countries like Sri Lanka, some are blaming climate policies for moving too far, too fast and exacerbating massive economic strains. States like California have experienced rolling black-outs, and electricity prices rose six times more than the rest of the United States between 2011 to 2019 due to the huge expansion of renewables.
10. Taiwan— Financial markets cannot ignore the designs that China has expressed on Taiwan and the South China Sea generally. Taiwan, sitting within 100 miles of China, is responsible for manufacturing 90 percent of the world’s semiconductor chips. Not much of anything can function without a chip these days, so if China ever succeeds in annexing Taiwan, U.S. reliance on China for its chips would have a significant economic and geopolitical impact on the country.
This distressed economic future tells me three things. First, from an investment point of view, markets are likely to get worse before they get better. Second, unless we start making hard economic decisions, things will get even tougher in the long term. And lastly, we must start identifying political candidates who are willing to prioritize and fix the financial and geopolitical challenges we face. If we don’t, other issues, no matter how important, will not matter.
Thomas P. Vartanian is executive director of the Financial Technology & Cybersecurity Center and a former federal bank regulator. He is the author of “200 Years of American Financial Panics: Crashes, Recessions, Depressions and the Technology that Will Change it All.”