The feds made the decision to stay the course with QT, this decision has very dire consequences. The fed’s objective is to reverse the damage caused by years of QE. It may seem logical but the loose money policy has engendered a financial market that no longer reacts normally, it has also skewed the amount of debt companies would normally hold.
Starting with the bail outs, the companies especially the banks ignored the business model which moderated the risk a business would take because they now had a safety net, the tax payer. They began to rely more on financial leveraging instead of their core business to improve their earnings. Businesses would obtain low interest loans and use the money to buy their shares, this worked to push their stock values up regardless of their earnings.
The country also indulged in taking on more debt as the economic languished. Debt can be a good thing if used properly but it is a death knell when used carelessly.
We currently have a situation where the country and the majority of companies are debt laden to a point where they can’t reduce their debt load. Since debt will become due at some time and it will have to be turned over or refinanced if the borrower is unable to pay off the loan, these new loan will be dependent on the new interest rate.
Herein lies the conundrum, as the feds raise the interest rate these new loans will have higher interest rates. At the same time, raising the interest rate will make dollar stronger when compared to foreign currencies. Look at the charts inside the purple rectangle. This steep rise occurred after the fed took the hawkish decision to continue QT and the future schedule of raising interest rates. As the dollar gains strength, companies exported goods become more expensive and sales will fall so companies meager profit will be further depressed.
The country will be affected as the huge national debt will be even more unaffordable. This was solved in the past but the US printing more money. This time is different as the other countries have been rallying around the BRICS to set up future trades of goods. Most importantly, the trading of crude. When this is operational (it’s getting very close and it already is functional to a limited degree), foreign countries will have no further desire to hold dollars and they will be returned to the US. When foreign countries no longer accept dollars for payment, imports will stop.
Financial pundits are predicting that the US’s economic downturn will make what occurred in 2008 look like child’s play.