Although the US Federal Reserve decided to maintain interest rates at its November meeting, they remain at their highest levels since well before the global financial crisis (GFC) of 2008/2009. The federal funds rate is at 5.25-5.5%, similar to the UK’s 5.25%, while in the European Union it is at a record high of 4%.

The reason for this is the high inflation that continues throughout the western industrial world. It’s so sticky that some, including Citadel’s Ken Griffin, predict it will be around for another decade or more. Therefore, central banks are currently considering higher interest rates, which may last longer.

This is a significant departure from what has become the norm over the past 15 years: extremely low interest rates enabled by endless credit cycles at the government, corporate and private levels. This constant flow of money led to a strong, consistent rally after the global financial crisis and kept stock markets afloat during the worst global health crisis in over 100 years.

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Investors are understandably concerned about what an end to this regime might look like, and they are right to be. If history has taught us anything, it is that capitalism is a game of boom and bust. And right now we are at the beginning of a new cycle.

While most of us look directly to 2008 to understand our current situation, it’s helpful to look back a little further. Between 1993 and 1995, U.S. interest rates rose rapidly as a flash crash in 1989, high inflation and tensions in the Middle East put pressure on the world’s largest economy. In response, the Federal Reserve raised interest rates from 3% in 1993 to 6% in 1995.

However, this increase did not harm the USA or its Western trading partners, but rather marked the beginning of an incredible period of growth. Between 1995 and 1999, the S&P 500 more than tripled in value, while the NASDAQ Composite Index rose an incredible 800%.

This was a time of globalization, innovation and optimism that led to the emergence of what has become the backbone of not only the global economy, but the lives of every person on the planet: the Internet. However, this didn’t last and by October 2002 the bubble had burst and the NASDAQ had given away all of its profits.

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Today, against the backdrop of increasing tensions in Europe and the Middle East, we are also living through a brutal period of high inflation and high interest rates. But the economy is also doing remarkably well despite everything it has experienced since the Covid-19 pandemic.

We can also draw parallels between the dotcom boom and crypto. January will almost certainly see one or more Bitcoin spot ETF approvals in the US, driving large waves of institutional money into this relatively new asset class. This could potentially trigger a wave of IPO activity within and outside the industry that, as in 1999, could eventually lead to a breakthrough.

While we can draw some comparisons to the 1990s, there is one key factor that brings us closer to the 2001-2007 market cycle: debt. As we all know – thanks to Margot Robbie, who explained it to us in a bubble bath – the years 2001 to 2007 saw one of the most reckless periods of lending and subsequent trading of those loans ever seen. And the result was world-changing.

Today we see frightening signs of 2008 as U.S. household debt reaches record highs and credit card loan default rates rise at their fastest pace since 1991. Instead of tightening their belts, U.S. consumers opted for so-called “revenge spending.” After being locked in their homes for almost two years, this is taking its toll.

Reversing this credit trend may not collapse the global banking system like it did in 2008; But it is important for the health of the US economy, which is currently driven by the US consumer. And the longer interest rates stay high, the greater the pressure will be as debts pile up.

And to address the 10-ton elephant in the room: It’s not just U.S. consumers who are running up debt. Thanks to the pandemic, the U.S. government is now weakened by more than $30 trillion. This is a previously unimaginable situation that has led to credit rating downgrades of the world’s largest economy, which everyone has previously dismissed as no big deal.

However, we have not yet reached the tipping point of the 2008 “credit crisis”. Although bond market activity suggests otherwise, the U.S. economy remains resilient – and especially the U.S. consumer. Higher interest rates haven’t stopped people from buying property, and no one seems interested in cutting spending since wages are still rising faster than inflation.

Difference between inflation rate and wage growth in the United States from January 2020 to September 2023. Source: Statista

We are also seeing some optimism in the markets, particularly in the cryptocurrency market, which has already begun its next bull cycle as investors drive away the ghosts of Terraform Labs, Three Arrows Capital, Celsius and FTX by piling into altcoins.

So chances are good that there will be an extremely strong bull market over the next year or two until the steam runs out, as it always does. At some point, the enormous mountain of U.S. consumer debt will collapse, especially if interest rates remain high for longer.

The key players in this cycle will be the US Treasury and the Federal Reserve. As we saw in March 2023, they are willing to rewrite the rules to ensure the survival of the banking system. If things start to shake, the goalposts are likely to move. But what goes up must also come down. We can be sure of that.

Lucas Kiely is Chief Investment Officer for Yield App, where he oversees investment portfolio allocation and leads the expansion of a diversified investment product range. Previously, he was Chief Investment Officer at Diginex Asset Management and Senior Trader and Managing Director at Credit Suisse in Hong Kong, where he led QIS and structured derivatives trading. He was also head of exotic derivatives at UBS in Australia.

This article is for general information purposes and is not intended to constitute, and should not be construed as, legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect the views and opinions of Cointelegraph.

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