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When interest rates go higher, it generally has the following effects:
Tight monetary policy: When central banks raise interest rates to combat inflation, it can lead to a reduction in borrowing and investment, which can slow down economic growth and lead to a recession.
Fiscal policy changes: Changes in government spending and taxation policies can also impact economic growth. If the government reduces spending or increases taxes during an economic expansion, it can lead to a slowdown in economic activity and a recession.
Financial crises: A financial crisis, such as a banking crisis or a stock market crash, can cause a sudden contraction in credit and investment, leading to a recession.
External shocks: Events such as natural disasters, war, or pandemics can also impact economic growth by disrupting supply chains, reducing demand for goods and services, and causing widespread uncertainty.
Speculative bubbles: When investors become overly optimistic and invest in assets such as stocks or real estate at inflated prices, it can create a speculative bubble. When the bubble bursts, it can cause a rapid decline in asset prices and lead to a recession.
Increased cost of borrowing: Higher interest rates make it more expensive for individuals and businesses to borrow money, which can lead to a reduction in borrowing and investment.
Reduced consumer spending: Higher interest rates can reduce consumer spending as the cost of borrowing for large purchases such as homes and cars increases. This can lead to a slowdown in the economy.
Appreciation of currency: Higher interest rates can attract foreign investors to a country, leading to an appreciation of the currency. This can make exports more expensive and imports cheaper, which can negatively impact trade and the economy.
Higher returns on savings: Higher interest rates can increase the returns on savings accounts and other low-risk investments, making them more attractive to investors.
Increased cost of debt: Companies that have borrowed money at a fixed rate of interest may see an increase in their debt servicing costs as interest rates rise. This can negatively impact profits and stock prices.
Decreased bond prices: As interest rates rise, the value of existing bonds decreases, since new bonds issued with higher interest rates are more attractive to investors. This can negatively impact bondholders.
We actually can see a lot of this right now. Other than the banking crisis the big tech companies like Amazon for example have already laid off 18,000 employees. There are also some companies talking about potentially doing four day work weeks. Now for those of you saying a four day work week will be Amazing! I will work four 10 hour days so I am in the office less and still working fulltime! I promise you it won't work that way. If a four day work week is implemented will be done to ensure employees are working less than fulltime. By having more employees work less than fulltime companies will not have to spend money on employee healthcare allowing the company to cut cost and possibly even be able to lay off less employees long term. If possible I think now is a good time for us all to think about what we want from the companies we work for within the amount of time we work there. We all put in our hard work there and should consider what we can also get to benefit from the companies we work for. Just to give an example of what I mean, maybe you can learn some office tools that allow you to work from home as a sole proprietor buissness. It is also possible your job have opportunities to go back to college at their expense to obtain skills that help you provide more value within the company. My point is seek more opportunities, acquire more skills so of the time comes and you lose your job or even a few hours you can safely adjust and still be able to provide for your family.
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