For the past 15 years, the US economy has been characterized by weak demand and low interest rates percentages. It was a decade and a half of "hangover" since the Great Recession. Now, experts point out that this is coming to an end. The world has changed and the US is entering an era of higher growth, creeping inflation and geopolitical instability that will redirect the flow of money around the world. A new era has dawned, but it will be uneven, writes Businessinsider in its analytical material.
The good news is that this new era looks like it won't be plagued by some of the problems that capped growth in the previous era. The most notable feature of the old period, according to economists, is the risk of deflation — the possibility that a lack of demand will lead to a fall in wages and prices, a trap from which it is extremely difficult to escape. In an effort to avoid this fate, policymakers in Washington cut interest rates to zero and encouraged all kinds of risk-taking behavior among investors, businesses, and ordinary consumers. Investors trying to hit their benchmarks "had to fall on the risk spectrum," says Josh Hirt, senior economist at Vanguard.
Silicon Valley put the internet on our phones, China blew a huge housing bubble and the world started investing in renewable energy. But low interest rates did little to stimulate demand, and the economy consistently grew more slowly than before the crash, never reaching above 3% GDP growth. It wasn't until the massive government stimulus spurred by the pandemic that the economy reached escape velocity, raising wages and starting to grow steadily.
Now, economists say, we are entering a supercycle that will be characterized by three overarching forces.
First - higher interest rates will reward savers, making it more expensive to take risks.
Second - geopolitical and economic instability will generate inflationary effects, and we will once again witness a surge in prices.
Third - industrial planning will be increasingly influenced by national security concerns, changing supply chains across industries. How low interest rates take hold will create a new gravitational pull on global markets, realigning the forces that determine where the economy is most likely to grow — and where investment is most likely to flow.
The new supercycle "puts the US economy into a completely new era" said Silas Myers, CEO of Mar Vista Investments, which oversees $4 billion in assets. He warns that an entire generation of investors, lenders and entrepreneurs have failed to grasp the "profound impact" that the new economic era will have on their businesses.
„We were in a time that was less demanding and more forgiving," Meyers says. "But that time is coming to an end."
One of the clearest signs that a new economic supercycle has arrived is when the financial rules are turned upside down, Businessinsider also writes. The previous supercycle was ushered in when the Federal Reserve, in response to the devastation caused by the financial crisis, cut its benchmark interest rate to 0% - the first time the central bank had bottomed.
The structural change caused shock throughout the world. Government bond yields fell, meaning investors had to start taking serious risks if they wanted to make money. This new adventurism pushed the stock higher and higher. Capital poured into China and other emerging markets in record numbers — about 1 trillion USD in 2010 alone. Venture capitalists poured billions into companies like Juicero and WeWork that had no viable profit plan. And with interest rates so low, companies can suddenly become saddled with debt: from 2007 to 2017, global non-financial corporate debt doubled to $66 trillion. USD. Until the pandemic hit, inflation and wage growth remained below 3.9%. The world had changed.
Now, with a new supercycle underway, money managers are again being forced to adapt to a changing set of economic realities. Usually, when the Fed raises interest rates quickly, the stock market shrinks. But that is no longer true. From 2022 to 2024, when the benchmark federal funds rate jumped to 5.5% from 0.5%, the Nasdaq 100 and S&P 500 jumped 23% and 22%, respectively. Higher interest rates also failed to spur mass layoffs or wreck the economy. Unemployment remained below 4.3% and GDP growth remained steady, belying fears of a recession. In short, something has messed up the natural interactions of the market. It's like you've put your hand on a hot stove and your fingers have become icy.
One explanation for the distorted behavior of the economy is a shift in what economists call the neutral interest rate - the optimal point for promoting growth without causing inflation. After the 2008 financial crisis, the economy was so weak that the neutral rate went to zero to encourage money to flow more freely. But now the strange nature of the market may signal that the neutral rate has risen above the Fed's ideal target of 2%. This would explain why the Fed's higher interest rates are no longer stopping growth. Fueled by post-pandemic government stimulus, the economy's baseline has shifted. At Vanguard, Hirt and his colleagues forecast that the neutral rate will remain higher for the foreseeable future, eventually settling at around 3.5%.
„Even if we fall below 3.5%, the Fed will anchor to that higher rate. If the economy experiences weakness and we have to cut rates, we don't yet think that means going back to zero,'' Hirt said.
The economy is "an extremely diverse and dynamic animal," says Joe Quinlan, chief market strategist at Bank of America. As the Fed's higher interest rates pressured interest-sensitive sectors like housing, which accounts for 16 percent of the economy, big tech and travel-hungry households spent money fast and loose. Experience has shown that aggregate consumption can continue to grow even when significant parts of the economy are struggling.
So what can we expect from the new economic supercycle? Like any cycle, it will have its advantages and disadvantages. Rising interest rates will make borrowing more expensive, forcing businesses to make more informed decisions about debt. But they will also increase savings accounts and interest income. In addition, a faster growing economy will tighten the labor market, allowing workers to continue to fight for a bigger piece of the pie. Since 2019, the bottom 10% of earners have received a 13% pay rise.
Whether it's capping drug prices or more aggressive enforcement of antitrust rules, polls show Americans want to see more limits on corporate power and more regulations to protect citizens. For the first time in years, the Federal Trade Commission has begun to go after drug companies, opposing mergers between food giants and making sweeping changes to Big Tech.
The new supercycle will also have profound implications globally, changing how and where money is most likely to flow. In China, the debt bubble that formed in the property sector during the previous cycle is draining money from businesses and households, undermining China's bid to become the world's leading economic superpower.
And with Europe growing more slowly than the US, foreign investors are directing more of their money to America. In the second quarter of this year, foreign investors held $8.2 trillion worth of US government bonds. USD, which is 7.3% more than a year earlier. Foreign investment also grew in US corporate bonds (up 9.8%) and US stocks (up 23%). Quinlan says he expects the U.S. economy to continue to outperform the rest of the world, given the fiscal and demographic challenges facing the European Union, Japan and China.
„Investors continue to take note of the fact that the US economy remains among the most competitive, innovative and sustainable in the world. Aviation or agriculture, energy or entertainment, transportation or technology, goods or services - pick any sector or activity and there's a good chance the US leads the rest of the world in all of these sectors. All this has helped to stimulate demand among foreign investors for US securities of all kinds,'' says Quinlan.
America's economic diversification is also expected to give it an edge in one of the most volatile areas of the new era: trade conflict. The US and China are already fighting for control of critical industries such as semiconductors, batteries and electric cars. Germany's dependence on manufacturing, for example, puts its most important industries at odds with China's ambitions. And while the U.S. is well-positioned to weather the storm, that doesn't mean it won't be severe. The world has never faced a challenge like China's booming export flow across the entire supply chain. It's a dynamic that threatens to unbalance international trade by flooding the market with cheap goods of all kinds. China Shock 2.0 "is not going to go down easily," Quinlan predicts.
For more than a decade, we have been used to the economy working in a certain way. With the onset of a new supercycle, investors, firms and governments that have structured themselves around the old model may experience sharp shocks. To succeed in this unfamiliar new world, they will have to adjust their expectations and find ways to exploit the supercycle's capabilities. This is the economic equivalent of natural selection: as the economy evolves, those who adapt are most likely to survive. The days of economic growth are back. The future belongs to those who can grow with it.