Interest rates probably won’t stay high, top economist Paul Krugman wrote in an op-ed. Higher rates are temporary due to lingering effects of COVID-19, and will likely be dragged down by lower investment demand. “What all this suggests to me is that the era of cheap money is not, in fact, over,” Krugman said. Loading Something is loading.
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Interest rates probably won’t stay high, thanks to a shrinking US workforce and a tech industry in the throes of a “midlife crisis,” according to Nobel laureate Paul Krugman.
In an op-ed for the New York Times, the famed economist pointed to the surge in interest rates this year, which has largely been spurred by the Federal Reserve’s fight to bring down inflation. Already, the central bank has raised rates by nearly 400-basis-points, driving up the cost of borrowing, and the yield on 10-year Treasury bonds to touch levels last seen around the 2008 financial crisis.
But rates are unlikely to stay this high for long, Krugman argued, suggesting that the era of “cheap money” – fueled by record low interest rates and abundant liquidity – isn’t over yet.
For one, higher rates are a lingering effect of the pandemic, when the government flooded the economy with stimulus money, Krugman said. Households are still spending leftover stimulus, which has supported high prices and therefore, higher interest rates this year. But those effects will eventually fade away – and, along with slowing investment demand, that will likely result in interest rates being dragged lower.
An investment slowdown would be a stark contrast from today’s market, which has shown exuberance for stocks since the pandemic. But that will be diminished, thanks to a slowing workforce in the US: boomers are retiring and younger generations haven’t yet replaced them, Krugman said. Together, those factors are expected to slow GDP growth and suppress investment demand.
“Investment spending will only remain high if we expect rapid economic growth. And what we know now doesn’t support that expectation,” he added.
An investment slowdown will also be spurred by what Krugman calls a “general disillusionment” in tech, pointing to a recent article from the Atlantic that painted the once high-flying sector as navigating a “midlife crisis.” While innovation in the 1990s and early 2000s had a bigger economic payoff, today’s investments are “ever worse,” Krugman said, noting that new projects—like Mark Zuckerberg’s huge bet on the metaverse—could be turning investors away from the space.
“What all this suggests to me is that the era of cheap money is not, in fact, over. A few years from now, we’ll probably be back to a situation in which too much saving is chasing too few investment opportunities, and interest rates will be revisiting their old lows,” he added.
Lower rates could potentially revive asset bubbles, though risk assets are feeling serious pain from today’s high interest rates. The S&P 500 has recovered some of this year’s losses but has is still down around 15%, and crypto’s rapidly plummeting values in 2022 have sparked a wave of crises, most recently the implosion of FTX amid a crippling liquidity crunch.