In the past, many countries were accustomed to borrowing to stimulate their economies, but after a sharp rise in interest rates, this debt-driven growth model became completely unsustainable, with both global debt levels and interest payments reaching record highs. While high interest rates have brought short-term economic pain, their deeper structural effects are gradually emerging over time. Moreover, the interest rate cycle will not remain high indefinitely and will eventually return to a low level through a mature transmission mechanism.

Government fiscal side: Falling into an interest trap, creating a vicious cycle of debt.

From a government fiscal perspective, high interest rates have trapped governments worldwide in a seemingly inescapable "interest rate trap." In the past, the long-term low-interest-rate environment meant extremely low interest costs for large-scale government borrowing, resulting in minimal economic consequences of debt expansion. However, with current persistently high interest rates, developed countries spend trillions of dollars annually on national debt interest alone—an expenditure exceeding global investment in artificial intelligence, defense, and clean energy. High debt interest rates significantly crowd out fiscal funds, creating a vicious cycle: continuously expanding fiscal deficits, soaring interest payments, increased pressure on public finances, and governments forced to continue borrowing to bail out their debts. A large amount of fiscal resources is consumed by debt repayment, severely squeezing development funds that could have been used for improving people's livelihoods, upgrading industries, and building infrastructure, thus weakening the long-term economic development potential of various countries.

Household wealth side: Interest rate divergence exacerbates wealth inequality.

From the perspective of household wealth distribution, the asymmetric impact of high interest rates has further exacerbated global wealth inequality. High interest rates have drastically different effects on different income groups, exhibiting a clear structural divide. Low- and middle-income families and young people are generally burdened with floating-rate debts such as credit card installments, floating-rate mortgages, and student loans. Rising interest rates directly increase their monthly debt repayment costs, continuously eroding their disposable income, shrinking their daily consumption space, and significantly increasing their living pressures. Conversely, high-income groups and wealthy families fully benefit from the rising interest rate cycle. On the one hand, most wealthy families have locked in fixed-rate mortgages at extremely low rates during the pandemic, completely avoiding the increased debt costs brought about by interest rate hikes; on the other hand, high interest rates have significantly increased the returns on deposits, wealth management products, and other assets, achieving wealth appreciation against the trend. Ultimately, this forms a typical pattern of "the poor bearing the burden, the rich benefiting," and the degree of social wealth inequality continues to deepen.

Macroeconomic perspective: Short-term pain in exchange for long-term economic recovery

From a macroeconomic perspective, high interest rates represent a necessary process of "cooling down" the economy, with short-term pain commensurate with a healthy long-term foundation. High interest rates significantly suppress corporate financing and expansion, while also curbing household borrowing and consumption, directly leading to a slowdown in short-term economic growth, a cooling job market, and temporary market pressure. However, from a long-term perspective, this tightening is a key means of correcting economic imbalances and can effectively suppress persistently high inflation. For ordinary people, the dilution of wealth and the impact on basic living standards caused by persistently high prices are far more detrimental than the short-term pain of interest rate hikes. Therefore, using high interest rates to achieve price stability and correct supply-demand imbalances is a necessary price to pay for reshaping a healthy economic ecosystem and solidifying the long-term foundation of the economy.

The Current Stage of the US Economy: A Critical and Sensitive Period for a Soft Landing

Focusing on the fundamentals of the US economy, it is currently neither in a deep recession nor in a boom cycle, but rather in the late stage of an expansionary cycle (late-stage expansion). The economy is still growing, but the growth momentum is no longer strong, and it is slowly transitioning from a boom to a cooling phase. The peak of prosperity is approaching, and it is no longer in a period of vigorous growth. AI may continue to prolong the boom, but interest rates have become the main threat. The tightening effect of high interest rates has been fully manifested, effectively suppressing market consumption and the pace of corporate investment expansion, but the overall economic resilience remains. Currently, US corporate balance sheets remain generally healthy, and there has been no large-scale corporate bankruptcies, unemployment surges, or systemic debt default risks. The economy is in a controllable adjustment phase, and its final trajectory is highly dependent on corporate profitability.

US economic cycle and debt projections

Earnings Meet Expectations: Soft Landing and Orderly Easing of Debt Pressure The overall profitability of US companies is a key indicator for predicting US inflation trends and debt risks. If corporate earnings meet market expectations, it signifies a successful soft landing for the US economy, with production and consumption maintaining a dynamic balance, and inflation gradually and moderately declining to the Federal Reserve's target range. Against this backdrop, the Federal Reserve will steadily begin a rate-cutting cycle, market interest rates will gradually decline, government debt interest payment pressure will continue to ease, and the overall debt level will enter a controllable and sustainable range. Earnings Fall Short of Expectations: Downward Economic Risks or Stagflation Risks Emerge If US corporate earnings continue to fall short of expectations, the US economy will face two major negative trends. First, continued deterioration in earnings will force companies to lay off large numbers of employees, leading to a reduction in household income, a sharp collapse in consumption, a rapid contraction in market demand, and a rapid dissipation of inflationary pressures, turning the economy into a risk of deflation. Second, companies will be hampered by persistently high costs, resulting in hindered profits, but with end-product prices remaining rigid, the economy will fall into a stagflation dilemma of high inflation and low growth. In a stagflation scenario, government tax revenue declines sharply, but rigid fiscal expenditures such as healthcare and pensions cannot be reduced, leading to a widening fiscal gap. The government can only rely on increasing borrowing to maintain operations, ultimately driving an explosive growth in the size of the US government debt and further amplifying long-term economic risks.

Summary and Future Trends:

From a long-term perspective, high interest rates are merely a temporary policy state and cannot be sustained indefinitely. As economic cycles iterate and markets self-correct, global high interest rates will eventually gradually return to lower levels. The core transmission path is clear: First, once inflation is effectively controlled, monetary policy returns to normal, and central banks initiate preventative interest rate cuts. Second, economic downturns and accumulated debt risks force monetary policy easing to offset these risks. Third, technological innovation drives increased productivity, opening up a new economic landscape of low inflation and stable growth, laying the fundamental foundation for a long-term low-interest-rate environment. In addition, oil prices are also a crucial variable: if global supply and geopolitical conflicts ease, leading to a decline in oil prices, this will directly suppress energy inflation and accelerate the pace of central bank interest rate cuts. Conversely, if geopolitical disturbances push up oil prices, a rebound in energy inflation will drag down overall inflation, delaying interest rate cuts and prolonging the duration of high interest rates. The convergence of these multiple paths will ultimately end the current dual predicament of high debt and high interest rates.