Renowned economic historian, Jim Grant, has voiced his fear about what he perceives as an inevitable financial fallout triggered by the Federal Reserve’s policies since the 2008 Global Financial Crisis (GFC). Grant, the publisher of Grant's Interest Rate Observer, has long been a critic of the Federal Reserve's approach, which included near-zero interest rates and quantitative easing, leading to what he terms an 'everything bubble' across various asset classes.
Anticipating a Partially Deflated Bubble
Despite recent market downturns and a banking crisis, Grant suspects that this bubble has only partially deflated. He anticipates significant disruptions in the credit markets as interest rates begin to rise. During the 'free money era,' companies, consumers, and governments accumulated substantial debt. As the era of low-interest rates comes to an end, Grant predicts that many entities will struggle to refinance or maintain their debt.
'Zombie Companies' and the Threat of Bankruptcy
He points to 'zombie companies' like WeWork, which survived on cheap debt but are now teetering on the brink of bankruptcy, as examples of the potential widespread financial instability. Grant also criticizes the tendency to fund unprofitable business models in anticipation of financial gains, a trend he attributes to the Fed's policies. Corporate bankruptcies are on the rise, and Grant, along with other financial experts, suggests that the economic distortions created during the free money era are yet to be fully addressed.
The Future of Interest Rates
Contrary to those on Wall Street who foresee rate cuts, Grant predicts that higher interest rates may persist for an extended period to combat inflation. This view aligns with recent statements from the Federal Reserve Chair, Jerome Powell. Grant's predictions serve as a wake-up call, urging us to brace for the potential fallout from the end of the free money era - a ripple effect that may be felt across all sectors of the economy, and one that's likely to redefine our financial landscape in the years to come.