Why The Fed Has Lost The Will To Normalize Rates (And What You Can Do About It)

McKinsey & Company, a multinational consulting firm, recently compiled data on global debt and economic growth. The company determined that worldwide debt has reached nearly $200 trillion dollars, up from roughly $140 trillion at the time of the 2008 crisis. Gross world product grew approximately $15 trillion to $70 trillion in the same time frame.

In other words, IOUs grew roughly 41% over the last seven years in a period when the global economy expanded at a more modest 27%. In what world can debt grow faster than economic output before countries and monetary unions eventually struggle to service debts? (A relatively short list of countries on earth can actually pay back the principal on the money that they owe; we are simply talking about an ability or inability to pay creditors the interest on their loans.)

An individual, a family or a nation can improve its standing in its quest to service debts in one of two ways. Incomes can rise or interest rates can decline. If we look at the U.S. Federal Reserve – one of a handful of central banks that has been talking about raising interest rates – chairperson Janet Yellen had been counting on probable wage inflation emanating from strong headline job gains over the last six months. Theoretically, if people are earning more, then they have a greater capacity to pay the interest on their IOUs, even if the interest rate climbs modestly. By the same token, if folks are working more, they’re likely to consume more, generating more tax revenue for the nation to pay the interest on its obligations.

Unfortunately, Janet Yellen and her fellow Federal Reserve colleagues cannot hike rates on theory alone. Headline job gains have not translated into anticipated wage increases. Theoretical constructs abound, but the truth of the matter is, there are more people looking for decent-paying jobs than there are actual positions. Higher paying careers have been giving way to lower paying positions since the Great Recession ended; a huge chunk of those positions are part-time. What’s more, when the actual unemployment rate is adjusted for labor force participation, you still have 10% of working-aged individuals looking for opportunities that no longer exist.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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