and offered to pay you back $1 dollar a second when would the principal be paid back???
I'll answer that, but first, I’m calling the game. The game is over. The game I’m calling is this ridiculous increase in interest rates as the fed looks backwards to predict where the economy is going...and keeps pushing rates up up up. I’m calling the top in rates and baring some black swan event, that interest rates will be under 3% in 2 years.
It takes a little bit of chutzpah to make this claim. Everyone in the popular press, at the big investment firms, the talking heads and the elevator operators are all saying rates are going up…because that’s what is selling right now…that’s what Jerome Powell is saying and that's what the market is being told to brace for.
So let me explain why I’m right and they are wrong.
I’ll start by saying it's not really game. Its serious stuff and there are economists, academics, CFOs and a whole cadre of minions in Washington who are doing mental gymnastics trying to get a handle on the economy and where its headed. Not that I’m any smarter than all these folks that have lots of letters after their names, but we all know their track records are no better than weathermen.
As a matter of fact…they are worse.
If you look back at some of my previous posts you can follow along with me as I point out that the folks on CNBC are actually dangerous for your economic health, that Chief economists at the likes of Morgan Stanley and Merrill Lynch are right about once every 5 years and EVERYONE who is a paid talking head is just hawking their wares or investment strategy du jour. (Actually, my favorites are the firms - that I used to work at - that have Chief Investment Strategists and Chief Economic Strategists…one says one thing and the other says the opposite…so the big firms are NEVER wrong.)
So, I’m really not placing a whole lot of faith in them being right “THIS TIME”. (https://www.quantumprivatewealth.com/post/negativity-its-right-for-about-a-minute)
But then… why listen to me? I guess the short answer is… don’t. Arm yourself with facts…and make your own decision. And as you do that here is the 800 pound gorilla that no one is focused on.
MONEY. Money and human nature.
Let's start at the beginning.
I believe the fed has over tightened, raised short rates too high and interest rates have (mostly) peaked. Sure they can go a little higher but every quarter point in interest is really expensive to the U.S. Federal Government. In short, interest expense will rise by over $200 billion this year if rates stay at the current level. If the Fed pushes rates higher then it will cost the government even more…so let's follow the money.
From Brian Wesbury at First Trust in September of last year:
What interest rate is enough? And when will politicians go bonkers over how much the Fed is paying the banks? After all, if we combine how much the Fed pays private (foreign and domestic) entities on both excess reserves and reverse repos, at a 3% rate it will be $150 billion per year. If the Fed raises rates to 4% under this new method of managing monetary policy, it will pay private entities $200 billion per year! Wait until politicians who love to hate banks find this out! Moreover, the Fed is now losing money on much of its bond portfolio because it bought so many bonds at low interest rates. At some point the Fed will be paying out more in interest than it is earning on its securities.
(updating to todays interest rates the new amount being paid is ~$270 billion...)
Why does that matter?? Because the guys in charge of the purse strings want things to continue and they want to maintain their lifestyles. Money is what allows that. Human nature...
Since 1970, federal debt outstanding has risen from $370 billion to $31 trillion. Yes, that’s a massive increase, but to be fair, that’s not the whole picture. The growth in the fed eral debt needs to be contrasted with economic and tax revenue growth. Sadly, even considering GDP and tax revenue, its growth rate is obscene. Fed debt has risen 4 times the rate of GDP growth and tax revenue have grown less than GDP.
There are lots of reasons that can all be squarely placed on our politicians who spend more time campaigning than reading the economic reports and like to promise a ‘chicken in every pot…for free’…BUT I’ll hold off on that for now. So let's follow the money...
It's pretty easy to see that as politicians made more outlandish promises, and told everyone to stay home and not work, maybe have a few extra children, but that they would still get a check in the mail so that they could afford to buy something on Amazon, that we needed to print more money. Maybe get a new nice mobile phone and why not, the government will pay for that too…it free! Print more money, raise the level of debt because since 1970 the interest rate on that debt had shrunk from over 8.5% to almost 1.5%. You bet, print more money, it's costing less to repay every year! And there is the rub… now it's closer to 3%. Its getting more expensive.
As mentioned, today the cost of this debt is +$200 billion higher than it was last year. That’s because since as we print money, we issue debt to cover it...unfortunately as rates started rising in 2022 the effective interest rate on federal debt grew by over 1%. Debt over that time, no matter what the White House says, has risen by $1.8 trillion. And as debt matures and is refinanced it now costs more. The interest expense increase since last year has cost approximately $328 billion more than in 2021…with about $50 billion of that the cost of new issuance.
So now let's follow the money…its estimated that the fed has refinanced about $8.9 trillion in debt and issued another $1 trillion…for a total of $9.9 trillion in ‘new’ debt. Some of the refinanced debt had very low rates…some maturing Treasuries had higher rates, and some had rates closer to today's rates. Throw that all in the blender and it's estimated that with no further interest rate increases the total federal interest expense should rise by about $226 billion over the next year...to over $1.15 trillion. (This is the follow the money thing) Contrast that with the TOTAL cost of debt in 2020-2021 of a total of about $240 billion…Yep, since 2021 the cost of the interest on our debt has grown more than 4x.
THIS IS NOT SUSTAINABLE. This is insane and if rates do not drop then the government will be unable to offer the ‘free’ stuff that they love to offer in exchange for votes. So again, follow the money. If this was your house, you would say 'lets cut back. We can't afford to keep spending like this'…but in Washingtom free stuff is how you buy votes. And if our politicians are good at anything it is keeping their very lucrative jobs firmly in their pockets. And higher rates are threatening to their way of life. So human nature alone will dictate that rates will cease this upward trajectory...and will return to the new normal. Political pressure will come to blows with Fed Chairpersons...Interest rates will drop. Lower forever...
Finally, I’m not a doom a gloomer about this debt level. It's up…the National Debt clock is getting a real workout…but up until two years ago when Powell seems to have heard of inflation for the first time, or he just woke up, the debt was very affordable. It's easy to pay interest on debt when the interest rate on that debt is less than the rate of inflation. And that what it was for quite a few years. Low rates allow our politicians to kick the can down the road...a tiger doesn't change its stripes and it's wrong to believe politicians will change theirs. Political pressure will come to blows with Fed Chairpersons...Interest rates will drop.
I'm not a doom and gloomer because I believe our interest expenses will drop and that we are on the cusp of serious economic gains driven by a whole host of new technologies and medical advancements. AI, gene therapy and fusion power will offer our children lives that we dreamt about while reading comic books under the covers with a flashlight. The future is bright. In the meantime, people will be people, politicians will offer free stuff and the money will continue to flow. It might be hard to see today but (facts remember...) ask yourself..."when was the last time it was really different?"
Ok...the answer to the question of how long it would take to pay back $1 trillion dollars at $1 dollar a second...1 trillion seconds = 31,709.792 years...that's called really 'kicking the can down the road...'
Information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information.
A professional adviser should be consulted before implementing any of the strategies or options presented.
Thanks to charts and graphs from Michael Lebowitz at RIA advisors and quotes and information Brian Wesbury at First Trust Portfolios.