For the everyday consumer, loans act as a leg-up to improve their quality of life (within reason), be it through a student loan, picking out a new car for a growing family, or purchasing a home. Whether it be expanding operations and hiring skilled workers, securing more cost-efficient equipment, or acquiring other companies, businesses use credit in a similar capacity.
Whatever the case may be, loans typically serve the liquidity demands of today under the assumption that they’ll lead to a net-positive outcome to offset the interest payments they come with.
It’s important to remember that credit is ultimately a tool and should be used appropriately—a hammer is best suited for a nail, not a screw. After the global financial crisis, central banks aggressively cut interest rates to zero or near zero; inflation above the interest rate (known as negative interest rates) incentives borrowers to spend or invest instead of saving, as money left in a savings account erodes purchasing power. In a nutshell, regulatory bodies may implement negative rates during deflationary periods where cash hoarding hurts overall aggregated demand.
When years of negative interest rates are capped by a global pandemic, countrywide lockdowns, increased government support for consumers, weakened supply chains, and pent-up demand without a release valve, you have the recipe for the 2023's economic environment.
Once restrictions were lifted and households were flush with elevated savings, central banks were faced with the difficult task of curbing demand. This wasn’t exactly easy. and after years of the softest monetary policy for quite some time, the pendulum has swung back with one of the most aggressive interest rate hike cycles in history. Public markets, like households and businesses, have struggled with these rapid changes.