After more than a decade, the U.S. Federal Reserve (the Fed) cut interest rates Wednesday. Although this column will go to press before the Fed decision is announced, I'm certain the Fed will announce a rate cut late Wednesday, so I want to focus on what this means for the U.S., global investors and you before it actually happens. After nearly a decade of near zero rates, the Fed began hiking rates in anticipation of a period when rate cuts would be warranted. We are, according to the Fed, in such a period.
What will a period of zero rates mean for the world? This isn't a hypothetical question as we have plenty of data from such a period following the 2008 Great Recession. The Great Recession was followed by what is perhaps the longest expansion in U.S history, depending on who's defining it. In periods of zero interest rates, investors need to find yields elsewhere. This is great for emerging markets or other "riskier" markets. As developed markets such as the U.S. and eurozone no longer offer any meaningful returns, investors will look to developing markets. They will also invest in riskier ventures and high-yield bonds. This will mean more risks will be taken by firms and with those risks a period of flourishing innovation and entrepreneurship.
While many technological advances we now enjoy as a planet can be traced back to investments in defense during the Cold War, perhaps many of the advances we will enjoy in the future will be traced back to this new era. Trillions will be invested in developing markets and developing technologies. An often-repeated term during the Great Recession, "return of capital is the new return on capital" will again be the norm. Technologies that improve efficiencies and pie-in-the-sky ideas will again get wider audiences. Many ventures will fail, while those that succeed will achieve astronomical growth.
I foresee a period where the entire buzz over automation and robotics will finally become a reality. This may also be the period of mass unemployment. Should such efficiencies come to fruition, hundreds of millions of unskilled workers will suddenly be obsolete and unemployed. Governments will be forced to come up with solutions to this employment crisis, while investing in education and re-training these individuals will be far cheaper to finance. Returns on investment in education are generally the one safe bet; imagine investing in a zero-interest rate environment. If the cost of capital is zero, any net positive return in the future will automatically make such an investment profitable.
Is this new era all rainbows and butterflies? Not necessarily. Like the 2008 Great Recession, this new era of zero interest rates may be accompanied by a massive sell-off in commodities, real estate and traditionally safe bets. This is why the Fed is cutting rates: to preempt such a financial disaster. Should the Fed be successful, everyone will be better off in the long run. Here's to a great future for all.
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