August 1, 2023 – Simple Logic – Why High Interest Rates Haven’t Caused U.S. a Recession

Don't know why many experts didn't express their opinion on this.

The Federal Reserve's interest rate has now exceeded 5%. Historically, rates above 5% have led to recessions, as high interest rates increase the burden on businesses, often leading to a debt crisis and subsequently a recession. So why hasn't this happened this time? The answer is quite straightforward. The net interest expenditure of non-financial companies in the U.S. has been declining throughout this rate hike cycle. This is largely due to the Fed's massive money printing during the pandemic, which led U.S. companies to leverage up and borrow a significant amount of money.

These debts have two characteristics:

  1. The interest rates are extremely low;
  2. Most of them are long-term debts.

This has led to two outcomes.

  1. Because the yield curve for U.S. government bonds is now inverted, borrowing so much long-term debt has been beneficial for these companies.
  2. Because these companies have borrowed so much low-interest debt, they now have a lot of cash on hand, and the money kept in banks can even enjoy the profits brought by this rate hike, thus reducing their pressure.

Most businesses are still thriving, so let's not even mention a recession for now. Even the ad revenues of internet companies, which are a barometer of the economy, have greatly exceeded expectations (the newly released financial reports from Google and Facebook are very telling, and the banking industry's reports show that the bad debt rate is still low, even lower than before the pandemic at 0.3%). However, these debts will eventually have to be repaid, and the cash held by U.S. companies, as seen in the last two financial reports, has already begun to decline, so we should still be vigilant.

As for when the first minor round of recession will occur, I personally think that if we only consider the issue of repaying operational debts of companies, it may take at least 2 quarters to start seeing a small part of the "crisis". Of course, I am very optimistic about the U.S. economy, especially after studying the financial reports of banks and tech companies. But I do have a tiny bit of concern. I always feel that the Federal Reserve and its backers are short squeezing the market, and after bringing the market back on track, they will do the reverse and slowly digest the risks.