The Dark Side of the Boon

As the Iran war continues with no end in sight and fuel prices elevated, one big question involves the future trajectory of inflation and interest rates: How high are they’re going rise? To answer this, tectonic shifts in the geoeconomic landscape need to be considered, Prof. Müller argues in a recent contribution to his series „What’s in a Graph“ on Substack. In his assessment, today’s setting resembles the world of the 70s and 80s rather than the period afterwards. In those decades real interest rates were considerably high. Throughout the 80s, the real Fed funds rate – the main U.S. policy rate – was 4.4 percent on average. In contrast, in the 2010s real rates were mostly negative. 

Going forward we should expect inflationary pressures to persist and interest rates to be positive in real terms, Müller suggests. However, most likely rates won’t rise as much as in the 80s since high debt levels render economies more sensitive to interest rate hikes. What’s more, the risk of a „rebalancing“ of capital accounts might lead to a severe financial crisis, likely leaving the US, so far the biggest debtor country and hence main beneficiary of imbalances, in a diminished geopolitical position.