Financial Markets Could Face Difficulties For Years To Come
Although we’ve already seen the U.S. government pump trillions into the financial system to prevent it from collapsing, it is by no means out of danger. Unfortunately, financial markets will most likely be in a precarious position for many years to come.
Investors have already shown some concern over the long term implications of the government’s massive debt load and in the past month yields on 10 year Treasury Securities have started to rise. Despite the fact that global demand is weak and is expected to remain that way for some time, we have also seen commodities markets start to creep up as well.
Inflation concerns will likely hound the U.S. financial market for years to come. It can’t hide from the fact that Treasury yields will most likely rise in order for the U.S. to fund it’s financial recovery plan.
This will have a spillover effect on consumer interest rates and will affect bond markets for years to come. The primary weapon to fight inflation is to raise interest rates but while that may keep inflation in check, it also serves as a severe handicap to economic growth.
There are no free lunches, so while the government’s massive intervention may have kept it from collapse in the short term, that same intervention will most likely keep it in a weakened state for quite some time. For now the dollar has kept it’s place as a reserve currency for the rest of the world but how long that will be the case remains to be seen.
The next few years will be very important, the severe debt load of the U.S. government was already a problem before the recent massive increase and will have to be dealt with sooner rather than later. While technically the funds the government used to save the financial system were loans and are expected to be paid back, they face a significant risk of losses due to defaults.
A number of federal agencies with the Federal Reserve and the Treasury at the forefront, will face a difficult balancing act over the next few years in order to maintain the stability of inflation and interest rates and it’s overall effect on economic growth and the financial system.
