The wave of high interest rates now sweeping the world resembles, in medical terms, a body suffering from high blood pressure, high blood sugar and high cholesterol all at once — on the verge of a major event such as a heart attack. When rates rise, pressure builds across the financial system (high blood pressure), and the debt burden accumulated by households and companies (cholesterol and blood clots) grows heavier. If that strain keeps building, the financial system breaks down, real purchasing power falls and the economy slides into the worst outcome of prolonged low growth (diabetes).
The causes of today's high rates are complex. Past eras of high rates typically arrived when economies were growing strongly and demand-side pressure drove up inflation and interest rates. The high-rate periods seen before the 2000s belonged to that pattern.
Recent high rates are different in character. Supply, rather than demand, is now driving prices and rate increases. As no-exit wars from Ukraine to the Middle East have dragged on, pressure has built across supply chains. That is the source of so-called sticky inflation, in which prices fail to fall even as rates rise. The Bank of Korea has already raised rates twice in a row, and expectations are gaining ground that the U.S. Federal Reserve will also move with back-to-back hikes.
On top of that, big technology companies such as Google are issuing enormous volumes of corporate debt, producing a crowding-out effect on U.S. Treasurys, the benchmark for global interest rates. By one analysis, corporate bond issuance this year by six U.S. big technology companies — Microsoft, Amazon, Google, Meta, Oracle and Nvidia — amounts to $187 billion (about 254 trillion won) when converted to 10-year equivalents. That is roughly half the volume of Treasurys the United States has issued this year.
Trillion-won investments by hyperscalers are also creating a kind of growth illusion, another departure from earlier rate-rising cycles. Capital spending has surged and lifted growth rates, but productivity gains from artificial intelligence have not kept pace, leaving lags and cost pass-through effects across the economy.
Even so, these causes alone cannot explain why the current high-rate environment has been labeled a "new normal." The prevailing view is that high rates will persist even if the wars end tomorrow or the mega-investment race among hyperscalers loses steam.
Behind this argument for prolonged high rates lies distrust of the fiscal policy of U.S. President Donald Trump's administration. The supplementary budget the U.S. government has requested from Congress for purposes including the war in Ukraine comes to $87.6 billion. Tariff refunds, after the tariff war was held up in Congress, amount to $115 billion. There is more. Whether it can actually be carried out is unclear, but the governing Republican Party has floated a cash-handout pledge to pay $5,000 to each American adult if it wins the midterm elections. Distributing that money to roughly 270 million American adults would cost 1,800 trillion won. Some market analysts now expect the 10-year U.S. Treasury yield to break through 5.5%, seen as the last line of defense, within the year. The paradox that populist policies end up weighing on the lives of ordinary Americans is where the U.S. economy stands today.
One reassuring point is that Korea has kept a step away from the recent global government bond convulsions. Yields on Korean treasury bonds have also been rising, but there is no sign yet of core investors pulling out. The reason is strong economic growth led by semiconductors. The Organisation for Economic Co-operation and Development recently raised its forecast for Korea's growth this year to 3.7%, up 1.1 percentage points from its previous projection. Korea's economy, in other words, still has the stamina to withstand the disease of high rates.
The government and the ruling Democratic Party of Korea said at a policy consultation on the 29th that they would expand support so that local government grants do not shrink even after a future response fund is established. President Lee Jae-myung also instructed officials to raise holiday discount support for next year to 1 trillion won using the future response fund. That appears at odds with the government's official position that the fund is a fiscal reservoir, not a pocketbook. One can only hope such remarks do not turn into distrust among global investors toward Korea's fiscal policy.
