"Poisoned Pennies"
Artificially low interest rates are a problem in themselves. They distort the real cost of capital, tempting people to borrow too much money. Debt increases...leading to a debt crisis of some sort.
by Bill Bonner
Dublin, Ireland - "What a delight! A presidential candidate - neither Democrat nor Republican - who has begun to address the important issues of our time. Moneywise: 'The most pernicious and insidious regressive tax on the poor': RFK Jr. slams the Fed, calls inflation and rate hikes 'poisonous medicines.' But he says there's an even bigger problem. Inflation impacts everyone by eroding the purchasing power of money. However, independent presidential candidate Robert F. Kennedy Jr. asserts that it's low-income Americans who suffer the most from rising price levels.
As you’ll recall from yesterday, debt growth is ‘unsustainable.’ It’s growing much faster than the economy that supports it. Somethins gotta give. Either the problem is solved intentionally... or unintentionally. RFK, Jr. is a graduate of the London School of Economics. He’s the only candidate to recognize that there is a debt problem. He’s proposing to tackle it. He’s also read at least a few of our Bonner Private Research posts. Whether they had any effect, we don’t know, but if he succeeds in solving America’s debt crisis, we intend to claim credit.
In his interview at Fox News, Kennedy went on to target high interest rates as a source of woe: “Our kids cannot get into a home because the interest rates have gone from 3% two years ago to - for them, the real cost - about seven-and-a-half or 8% to buy a home,” he said. Uh oh... was he suggesting that interest rates should be held down by the Fed? Didn’t he know that it was the Fed’s ultra-low interest rate policy that caused today’s huge debt overhang?
Instead, Kennedy came up with a fairly original and interesting angle: Kennedy believes that both inflation and rate hikes are mere stopgaps for a more significant issue. “The long-term issue is spending, because inflation and high interest rates are just medicine and they both are poisonous medicines,” he argued. As a result, he suggests that “we need to get spending under control” and “dramatically reduce” military spending. Artificially low interest rates are a problem in themselves. They distort the real cost of capital, tempting people to borrow too much money. Debt increases... leading to a debt crisis of some sort.
American Milei: But Kennedy is right. The feds spend too much. They borrow too much. They need lower interest rates to support the debt. And they ‘print’ money to help keep rates low. Low rates... high rates... inflation... inflation control – all are linked to excess spending. The dots connect. And if the problem is to be addressed, intentionally, spending is the place to begin. It has to be brought under control.
It would be nice if a real reformer – maybe like Milei in Argentina or Kennedy in the US -- could solve the problem in an orderly... sensible... way. The wars could be stopped. The budget could be balanced. Peace and prosperity could be restored to the land. But it seems unlikely. Biden and Trump are the front runners. Neither has any interest in the problem – or even any awareness of it. And the whole Beltway, Wall Street, University, Media, Military Establishment benefits from the system as it is. Would this ‘Deep State’ permit a turnaround? Probably not.
So, let’s look at how the debt crisis might play out — unintentionally. We got a hint of it on Tuesday. MarketWatch: "After months of range bound trading, the benchmark 10-year Treasury yield appeared to be settling into a pattern similar to what was seen last October, when the rate soared to its highest level since 2007 and briefly burst through 5%. The 10-year rate — used as a benchmark for everything from student debt to auto loans and mortgages — rose 3.4 basis points to end at 4.363% or its highest level since Nov. 27. Yields as far away as Asia, Australia, New Zealand and Europe climbed in unison."
In simple terms, as the US debt grows - we now see it easily going to $50 trillion by 2034 - so does the interest expense. It was $659 billion in 2023... and next year it will approach one trillion. No one really cares how large the debt becomes. But the cost of servicing it must come out of current income. And every penny of earnings that we must devote to paying for yesterday’s bungles is a penny less we can enjoy today. At some point, we have few pennies left...
RFK, Jr. is the only candidate taking the danger seriously. He says the interest will go to 50 cents of every tax dollar within five years. In ten years, it will take 100% of tax revenues. Somewhere along the way, the bond market will spook. Interest rates will soar. And the cost of carrying debt - or adding new debt - will be too much to bear. Then, the US will have no choice. Either it admits that it must cut back, drastically... or it panics, prints money and sends the whole world economy into a real inflationary catastrophe. More to come..."
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