Dr. Francois Stofberg: Senior Economist at Efficient Wealth and the Managing Director of Efficient Private Clients.

As the United States (US) focusses on the results of the presidential election, America’s economic success is front and centre. The US economy has grown nearly 3% on average for nine consecutive quarters, and foreign investors have eagerly poured capital into American assets. This influx has pushed the US’ share of the global stock market to an unprecedented 60%. But behind this image of prosperity, there is a reality that is less glamorous and far more troubling. For many Americans, this growth feels distant, as most economic benefits remain concentrated among the affluent.

At first glance, the US economy looks robust with strong corporate profits, continuous growth, and heightened foreign investment. Yet, the benefits are largely restricted to the wealthy, while most Americans struggle to keep up with rising costs and stagnant wages. The wealthiest 20% of households account for 40% of all consumer spending, leaving the bottom 40% to stretch their limited resources to cover the basics. This divide paints a picture of what some call a “gilded economy”, where growth appears impressive but is heavily concentrated and brittle.

A debt-fuelled mirage

The economic growth is also highly unusual because it is not fuelled by private-sector investments but by substantial government borrowing. The US deficit has more than doubled over the past decade, now exceeding 6% of its gross domestic product, with government spending supporting much of the economic activity. Historically, government borrowing increases to stabilise the economy during downturns but, today, it is the engine behind what we see as prosperity. Rising deficits have also driven up corporate profits, following the Kalecki-Levy equation, a century-old economic relationship that links corporate profits with government deficits.

This dependence on debt introduces long-term risks. While foreign investors continue to buy US assets and treat the dollar as a safe haven, the nation’s debt burden could eventually become a significant vulnerability. Rising long-term interest rates already signal potential trouble on the horizon. Historically, when countries rely too heavily on debt, they face financial challenges once investor sentiment shifts. Although the US enjoys unique advantages as the issuer of the world’s reserve currency, this privilege may not be immune to shifts in global confidence.

Generational challenges and social shifts

As wealth increasingly pools at the top, younger generations find it more challenging to achieve financial stability. Many young Americans now spend nearly half of their income on rent/home ownership, while marriage and family formation are delayed owing to rising costs. These pressures have led to notable social shifts, with many young adults embracing frugal lifestyles.

The financial strain has also boosted the popularity of social media “financial influencers” who promise pathways to independence through side hustles and strict saving regimens. This phenomenon reflects a generation eager for economic security in a landscape where traditional wealth-building pathways seem increasingly inaccessible. As a result, optimism about the future is divided along income lines: While affluent Americans remain confident, young and middle-income individuals feel excluded from the economic boom.

Lessons from history

History shows that great economies often falter when debt outweighs growth, burdening future generations. Although the US currently benefits from its economic strength and global demand for the dollar, no country is immune forever. Other developed nations are already facing the consequences of unchecked deficits, as investors penalise them for prolonged fiscal imbalance. The US has avoided similar penalties, owing to its unique position in the global economy, but this advantage might not last indefinitely.

As Americans vote for a new president, they confront more than just a choice between parties. They face a decision about the economy’s direction and whether it should be reoriented towards sustainable, inclusive growth. To avoid a future marked by economic fragility and mounting debt, the next administration must prioritise fiscal responsibility and policies that address widening inequalities. Without such measures, America’s growth may remain a thin, gilded surface; one that is vulnerable to the next economic storm.

Dr. Francois Stofberg: Senior Economist at Efficient Wealth and the Managing Director of Efficient Private Clients.

The first interest rate cut by the Federal Reserve (Fed) has happened and now the focus has shifted from “when” to “where”: Where are interest rates heading next? This shift is more than a mere change in phrasing; it is a sign of the evolving economic landscape, with real consequences for growth, investment, and employment.

The path of interest rates affects every corner of the economy, from the cost of borrowing for a home to whether companies invest in new projects. Economists use the term “neutral real Fed policy rate”, or R-star, to describe the level of interest rates that is neither too stimulative nor too restrictive for economic growth. This is a kind of Goldilocks zone: Not too hot, not too cold, but just right.

In 2018, inflation was on target at 2% and unemployment was low. The Fed raised its policy rate to 2.5%, translating to a real rate of about 0.5%. Many viewed this as the new normal for monetary policy. But the financial landscape has changed since then. The yield curve (a key indicator used by economists to determine where rates are headed) has shown unusual trends, making this moment different from the past.

Before the global financial crisis, real policy rates typically hovered around 2% but, now, projections suggest a target for the funds rate of about 3% once inflation stabilises at 2%. However, determining the neutral rate today is more challenging, particularly as the world wrestles with new forces like rising government debt, shifting demographics, and the transformative power of artificial intelligence (AI).

Some experts believe that the neutral rate needs to be much higher than the pre-pandemic 0.5% level, citing factors such as rising deficits, which require higher interest to attract investors, and the prospect of an AI-driven productivity boom, which could increase demand for loans. If companies need more money to invest in technology and innovation, interest rates might need to rise to balance that demand.

There is also the term premium to consider. The term premium is the extra return investors demand to hold longer-term bonds instead of shorter-term bonds. Typically, the yield curve has a positive slope, meaning rates increase over time to compensate investors for holding longer-term debt. However, recent inversions (where short-term rates are higher than long-term rates) have caused confusion and concern. These inversions are likely a temporary distortion rather than the new normal.

The yield curve is expected to adjust by steepening (where long-term rates rise relative to short-term rates) to attract enough buyers for the growing pile of government bonds. Investors will demand a higher term premium, meaning that they will want more return for holding bonds for longer. For fixed-income investors, this could be a positive development. They might be rewarded not only for the interest rate risk that they bear but also enjoy the hedge that bonds provide when the economy hits a rough patch.

What does this mean for interest rates in South Africa (SA)? The Fed’s actions often have significant ripple effects on emerging markets, including SA. As United States interest rates adjust, SA may face increased pressure on its own rates to maintain investor confidence and manage capital flows.

The evolving interest rate landscape is a story of change; a story that affects each of us differently, depending on our place in the economy. But, as with most things, change also brings opportunity. For those willing to adapt, the shifting contours of rates, yields, and economic policy could open new doors to financial security and growth.