There are plenty of telltale signs of a coming recession. We’re aware of the massive number of job cuts, store closures, and foreclosures in this year alone. However, this time won’t be just a recession but rather an enormous economic crisis.
Low Rates Caused the Economic Crisis of 08
Before the 2007-08 economic crisis, there was a previous crash that occurred, the 2000-2001 dot.com bubble. After the dot.com crash, the Federal Reserve decided to lower interest rates from 6.5% down to 1%.
The rates were kept at 1% for about one year from June 2003 to June 2004. However, it took the Fed two years to raise interest rates from 1% to 5.5%, from 2004 to 2006.
Now picture this, rates were below 2% for three years, resulting in massive borrowing from American consumers, businesses, and even governments.
The housing crisis wasn’t a housing crisis at all. It was a debt crisis that was led by the housing market. But the spark in the debt bubble was the low-interest rates that were set by the Fed.
Whenever interest rates are low, it entices people to borrow currency. The more extended rates are held low, the more debt people continue to acquire.
In this case, ahead the housing bubble rates were held low for three years. Not a long time but look at the damage it caused, a crisis that many American are still experiencing.
However, fast forward to after the housing crisis. The Federal Reserve immediately dropped rates to zero and kept them at zero for seven years.
Interest rates didn’t rise above 1% until 2017, staying there for a total of nine years. Already we way surpassed the three-year low rate cycle that caused the housing bubble.
In Comes Quantitative Easing
Even today rates are still low, currently at 2.25%. Well below the historical average of about 6%. Also, unlike during the previous low-rate cycle, we executed quantitative easing (QE). What is QE? Just another name for monetizing the debt, or printing money to stimulate the economy.
Naturally, QE sent terrible signals to the markets and allowed Americans along with the government(s) to take on more debt than previously. Why not right? It’s virtually free money, minus the inflation of course.
So let’s summarize, we have eleven years of low-interest rates along with seven years of quantitive easing compared to four years low-interest rates. As you can see the aftermath of the 2008 recession is massively different compared to the outcome of the 2001 recession.
But if the outcome of the 2001 recession led to the great recession of 2008, one must ask, just how big is the upcoming economic crisis? As Major “Dutch” Schaefer would say, “It’s going to be one ugly