After years of low interest rate policies, surging rates in 2023 could lead to trouble for individual investors, institutions, and the economy as a whole. It’s important for people to remember that since about 2008, the US government has worked with a zero-rate policy. But now, the Fed continues to raise those same rates. The short-term fallout has been a series of record setting benchmarks for mortgages and Treasury bonds. That might be good news for holders of bonds, but it’s a negative situation for everyone else, particularly borrowers, most investors, and anyone looking to purchase a home.
Causes
What’s the cause of the new crisis? Most of the troubles began shortly after 2021 when the US government doubled down on massive deficit spending. Alongside that dire move was an accompanying inflation rate that government experts swore was transitory. In the two years since that denial, inflation has continued to creep up to record highs. Those price level increases, combined with rampant deficit spending, created a cancerous brew that led to ever-rising bond and mortgage rates. The effects are widespread because whoever uses money or credit feels the pinch. The tech sector, real estate markets, stocks, vehicle sales, financial institutions, and individual investors are all facing the same dilemma: what to do about rising interest rates.
Action Plans
The most effective way to offset the bad effects is to examine the situation and find out how the situation from 2008 until now slowly moved from a very favorable to a sour one. Further, it’s helpful for individual investors to realize that there are specific tactics for battling inflation and maintaining a decent rate of return on their portfolios. In addition to asset classes that have the potential to perform well in any kind of economy, people can develop alternative sources of income to diversify their personal finances. Consider the following information before constructing a plan of action.
Alternative Sources of Income
In times of economic volatility and personal financial uncertainty, it’s imperative for individuals to find viable alternative income sources. The best trading platforms offer beginners and experienced investors the chance to earn a profit from the markets. What kinds of asset classes do people consider when they need an extra income source? Many turn to real estate, while others prefer to put at least some of their capital into commodities like precious metals. While most take on part-time endeavors, many strive to build full-time income from the markets.
Others set up small online e-commerce stores, take part-time jobs, or operate service businesses from the comfort of their homes. However, when markets are volatile and unpredictable, many turn to activities like forex trading, scalping gold futures, day trading, and various forms of short-term investing. The beauty of personal trading accounts is that people can work just a few hours per week as scalpers or traders in an asset class, like crypto or gold, that they understand and enjoy.
How Low-Interest Rates Helped in the Past
After the financial crisis of 2008 and a series of worldwide repercussions, nearly all the world’s central banks followed a strict policy of holding rates to or near the zero level. That plan seemed to work well for more than a decade. The exception to the zero scenario was when the US government broke with global policy and hiked the rate for a short while. About a year after that brief experiment, they moved the number back to zero when 2020’s pandemic arrived. There were other policies in effect that worked to help consumers purchase homes. With homeownership up and production slowdowns during COVID, problems began to arise.
But before the virus struck, consumers in the West enjoyed the effects of a generally healthy economy. Not only were houses priced below market values, but small cap firms and corporations had plenty of money to spend on growth. That’s just one of the reasons the S&P 500 did so well between 2010 and 2020. Real estate investing was a growth industry for individuals and corporations who found it easy enough to flip properties and turn a profit doing so. Asset classes that benefited from the scenario included cryptocurrency, rental real estate, and dozens more.
But the bottom started to fall out when a perfect storm of economic bad news coalesced to wreak havoc. Around the same time as a pernicious housing shortage developed, the COVID-19 pandemic led to widespread industrial and retail business shutdowns. Productivity plummeted, and inflation began to take hold. Fast-forward to late 2023, when high-interest rates are teaming up with inflation to produce a laundry list of negative effects.