The Rabid Capitalist

Professor Glenn A. Okun

Bloomberg reported that current U.S. economic performance may require the Fed to increase its GDP forecast and defer interest rate cuts projected for 2024.  It is conceivable that further interest rate increases may be required.

The consequences of growth may include the worst of all worlds: a soft landing for Main Street and a hard landing for Wall Street.  Real economic growth will not only fail to mitigate the debt overhang (see https://therabidcapitalist.com/2023/08/07/another-approaching-storm-multifamily-commercial-mortgages/, https://therabidcapitalist.com/2023/08/03/another-looming-debt-crisis-and-an-investment-opportunity/ and https://therabidcapitalist.com/2023/08/08/shots-across-the-bow-warnings-from-the-credit-markets/) but also may exacerbate it. 

Deferred interest rate easing due to growth-related inflation will create the worst-case financing environment where a prolonged period of high interest rates hinder borrowers’ attempts at refinancing.  Unfortunately, GDP growth will not significantly improve the fortunes of weak creditors (B-grade offices and urban shopping centers and overvalued private firms).  The rising economic tide will disproportionately favor the strong.  Mediocre assets and firms that benefitted from hyper-aggressive underwriting and abnormally low interest rates will not be rehabilitated since the refinancing of current debt loads would remain impossible.  A default wave would be inevitable.

The Fed would be faced with a difficult choice.  It could rescue the financial sector and the capital markets by drastically reducing interest rates (providing liquidity) but would fuel inflation simultaneously.  If it chose to maintain the restrictive interest rates needed to fight inflation, significant damage to the capital markets would ensue.

As a result, the U.S. economy could grow its way into a financial crisis, where the realization of write-offs and write-downs in the financial sector would damage credit creation depriving Main Street of the capital required to fund growth leading to economic stagnation. 

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