Guest Post by Peter Reagan
If you’ve ever tried to pick a restaurant with a group of friends, you know how reassuring consensus can feel. One person wants Chinese food, another wants Mexican, and the person who insists, “I’ll eat anything” somehow vetoes every suggestion.
(Ask me how I know.)
Eventually, everyone just wants an answer.
I think we often approach the economy the same way. We want the experts to agree about what’s happening before we decide what it means for us.
The trouble is, sometimes they simply don’t.
This desire for consensus, for agreement goes far beyond the social situation that I mentioned earlier in which getting together with friends was more important to everyone than agreeing about what to eat. For many people not having consensus about what is happening can be very stressful.
And right now, there’s a striking lack of consensus over one important economic question:
Why are long-term U.S. government borrowing costs rising?
On one side is Federal Reserve Bank of New York President John Williams (not to be confused with the composer of the music for Star Wars). Williams argues that rising long-term borrowing costs primarily reflect “a strong U.S. economy and a strong economic outlook,” fueled in part by heavy investment in AI, data centers and technology.
He specifically downplayed inflation fears as the main explanation.
That would certainly be encouraging if Williams is right. A strong economy is preferable to a weak one, and sustained growth tends to support employment and household incomes.
But there’s an important catch: Economic growth doesn’t automatically mean your purchasing power improves – especially when prices are still rising faster than the Fed would like.
There is a difficulty with this situation, though, no matter how favorable it sounds. A strong economy can give the Fed more latitude to keep interest rates elevated while it tries to bring inflation under control.
And inflation is still well above target.
The Fed defines price stability as 2% inflation over the longer run, measured by the Personal Consumption Expenditures price index. According to the Bureau of Economic Analysis (BEA), PCE inflation was running at 3.7% over the 12 months through July, while the Fed’s closely watched core PCE was 3.3%.
In fact, Friday’s latest employment report gave Williams some additional ammunition: Employers added 162,000 jobs in August, while unemployment held at a historically low 4.1%.
That distinction matters at the grocery store. Even if inflation continues to slow, that doesn’t necessarily mean grocery prices go back down. Positive inflation simply means prices keep rising – hopefully at a slower pace.
So Americans who already feel squeezed by several years of higher prices don’t automatically get relief just because the broader economy continues growing.
So, a strong economy is one explanation that we’re hearing.
But Williams’ explanation isn’t the only one.
Reuters reports that observers point to several forces pushing long-term government borrowing costs higher: enormous amounts of government borrowing that must be absorbed, resilient economic growth, inflation risks, expectations that the Fed may keep rates elevated and questions about foreign demand for U.S. government debt.
In other words, the disagreement isn’t really between two neat explanations. Several pressures may be operating at the same time.
Treasury Secretary Scott Bessent takes a relatively optimistic view. He pushed back on concerns about strains in the government debt market, arguing that the United States is in a stronger position than many other advanced economies because its economy continues to grow despite large budget deficits.
“What’s important, too, is that we are growing,” Bessent told Reuters.
Now, in business, when you hear an argument like this, it’s typically based on the idea that future net profit will increase with increasing business revenue.
There is legitimate economic logic behind that argument. What matters isn’t simply the number of dollars the government owes, but the debt burden relative to the size and productive capacity of the economy.
Faster economic growth can make a large debt load easier to carry.
But that raises another question: Is growth alone enough?
And this is where the arithmetic gets uncomfortable.
The nonpartisan Congressional Budget Office projects that debt held by the public will rise from about 101% of GDP this year to 120% by 2036. Over the same period, annual net interest costs are projected to grow from about 3.3% of GDP to 4.6%.
Economic growth certainly helps. But CBO’s projections already assume continued economic growth – and the debt burden still rises.
Now, don’t misunderstand me. I certainly hope that Bessent is right. I want a strong U.S. economy, an economy that is vibrant enough to handle and, ideally, eventually pay off the federal debt.
But growth doesn’t make the debt disappear.
America has now accumulated more than $40 trillion in federal debt. For economic comparisons, CBO focuses on the narrower measure of “debt held by the public” (excluding debt which one government department, like the Treasury, owes to another department, like Social Security). That public-debt number is roughly 101% of GDP this year – already around the size of an entire year’s economic output.
More important than the headline number is the direction: CBO projects that burden will continue growing rather than shrinking. Obviously, rising refinancing costs make the debt number compound faster…
I don’t think there’s much point in asking, “When will America pay off every dollar it owes?”
If you look hard enough, you can even find economists who argue (with a straight face) that paying off the U.S. national debt would cause an economic crisis of Biblical proportions. I happen to think they’re wrong, but that’s a different conversation.
Here’s the question we should focus on:
Can the economy and federal revenues grow fast enough (and deficits narrow enough) to keep the debt and its interest costs manageable?
Right now, CBO’s answer is not especially comforting. Its baseline has net interest costs more than doubling from a little over $1 trillion this year to $2.1 trillion in 2036.
Now, depending on how old you are, 2036 might make it sound like we’ve got plenty of time to solve this! I respectfully disagree. Keep in mind, that’s just 10 years from today. For comparison purposes, 10 years ago in 2016, the national debt was less than half today’s total.
Here’s the real problem: There’s no way to know, in advance, when “an awful lot” becomes “too much.” There’s no specific number that will make investors suddenly change their minds about the safe haven status of federal government debt. (Although central banks are already changing their minds on “safe haven” assets…)
It’s more like Ray Dalio’s “economic heart attack” metaphor. He describes federal debt in the economy to plaque building in a person’s arteries after a lifetime of double cheeseburgers on the sofa – over time, circulation slows down. Health declines. You know something should be done about it, but so long as there’s no emergency, there’s no urgency to get off the sofa and exercise… Unfortunately, by the time the situation reaches actual crisis, it’s too late to prevent it. Then you’re calling an ambulance if you’re lucky, and a hearse if you aren’t. Yes, it’s a scary metaphor! That’s the point.
There aren’t many painless ways to improve the math. Washington can restrain spending, collect more revenue, hope for stronger economic growth – or continue borrowing. Currently, the administration is pursuing all four strategies with varying degrees of success.
There’s another, sneakier, solution: Inflation can reduce the real value of debt over time – especially when refinancing costs are lower than the annual rate of inflation. But that is hardly a “free lunch” – inflation erodes everyone’s purchasing power. Persistent inflation can itself contribute to higher government borrowing costs, because lenders aren’t stupid. Who’d loan a government money at 3.5% when inflation is at the same level? The higher inflation goes, the more lenders demand to lend money…
Here’s the thing: Every path involves trade-offs. There’s no easy answer. That’s precisely why letting the debt problem grow year after year doesn’t make it go away – it just makes the solutions harder.
Large government deficits can add to inflation pressure too (but the relationship isn’t necessarily automatic).
The pandemic is a useful example. Federal Reserve researchers found that extraordinary fiscal support boosted demand for goods while production struggled to keep pace, contributing to inflation. (Supply-chain disruptions and other forces mattered, too – overall it’s a more complicated story than I thought at the time.)
Growing federal debt doesn’t inevitably create inflation. But it does make existing inflation pressures worse.
And here’s where the disagreement over why borrowing costs are rising becomes less important than the fact that they are rising.
Reuters explains that higher long-term government borrowing costs filter down into mortgage, auto loan and credit card rates. They also increase Washington’s own interest expense, leaving less room for other priorities without higher revenue, spending reductions or still more borrowing.
That creates an ugly feedback loop:
Whether John Williams or the fiscal worriers have the better explanation, American households can wind up feeling the consequences either way.
We may not know which explanation for today’s higher borrowing costs will ultimately prove most important. What we do know is that persistent inflation, rising federal debt and higher borrowing costs can all put pressure on household purchasing power.
If that uncertainty concerns you, this may be a good time to learn more about diversifying a portion of your retirement savings with physical precious metals.
The dollar buys less today than it did a year ago, a decade ago, a generation ago. That slide is the predictable result of endless printing and borrowing. Dr. Ron Paul believes the FED has the answer. But they’re keeping it to themselves. Fortunately, a new financial chart has publicly exposed their secret moves. See it for yourself: https://freekit.birchgold.com/lf/ro...D_v02a_article&placement=article&cid=rp_media
To learn more about how physical gold could help protect your retirement portfolio, click here to get your FREE info kit on Gold IRAs from Birch Gold Group. And now introducing a Crypto IRA to capitalize on the fastest growing market in the world.
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[ H/T The Burning Platform ]
If you’ve ever tried to pick a restaurant with a group of friends, you know how reassuring consensus can feel. One person wants Chinese food, another wants Mexican, and the person who insists, “I’ll eat anything” somehow vetoes every suggestion.
(Ask me how I know.)
Eventually, everyone just wants an answer.
I think we often approach the economy the same way. We want the experts to agree about what’s happening before we decide what it means for us.
The trouble is, sometimes they simply don’t.
What if there is no consensus?
This desire for consensus, for agreement goes far beyond the social situation that I mentioned earlier in which getting together with friends was more important to everyone than agreeing about what to eat. For many people not having consensus about what is happening can be very stressful.
And right now, there’s a striking lack of consensus over one important economic question:
Why are long-term U.S. government borrowing costs rising?
On one side is Federal Reserve Bank of New York President John Williams (not to be confused with the composer of the music for Star Wars). Williams argues that rising long-term borrowing costs primarily reflect “a strong U.S. economy and a strong economic outlook,” fueled in part by heavy investment in AI, data centers and technology.
He specifically downplayed inflation fears as the main explanation.
That would certainly be encouraging if Williams is right. A strong economy is preferable to a weak one, and sustained growth tends to support employment and household incomes.
But there’s an important catch: Economic growth doesn’t automatically mean your purchasing power improves – especially when prices are still rising faster than the Fed would like.
There is a difficulty with this situation, though, no matter how favorable it sounds. A strong economy can give the Fed more latitude to keep interest rates elevated while it tries to bring inflation under control.
And inflation is still well above target.
The Fed defines price stability as 2% inflation over the longer run, measured by the Personal Consumption Expenditures price index. According to the Bureau of Economic Analysis (BEA), PCE inflation was running at 3.7% over the 12 months through July, while the Fed’s closely watched core PCE was 3.3%.
In fact, Friday’s latest employment report gave Williams some additional ammunition: Employers added 162,000 jobs in August, while unemployment held at a historically low 4.1%.
That distinction matters at the grocery store. Even if inflation continues to slow, that doesn’t necessarily mean grocery prices go back down. Positive inflation simply means prices keep rising – hopefully at a slower pace.
So Americans who already feel squeezed by several years of higher prices don’t automatically get relief just because the broader economy continues growing.
So, a strong economy is one explanation that we’re hearing.
The other side of the coin
But Williams’ explanation isn’t the only one.
Reuters reports that observers point to several forces pushing long-term government borrowing costs higher: enormous amounts of government borrowing that must be absorbed, resilient economic growth, inflation risks, expectations that the Fed may keep rates elevated and questions about foreign demand for U.S. government debt.
In other words, the disagreement isn’t really between two neat explanations. Several pressures may be operating at the same time.
Treasury Secretary Scott Bessent takes a relatively optimistic view. He pushed back on concerns about strains in the government debt market, arguing that the United States is in a stronger position than many other advanced economies because its economy continues to grow despite large budget deficits.
“What’s important, too, is that we are growing,” Bessent told Reuters.
Now, in business, when you hear an argument like this, it’s typically based on the idea that future net profit will increase with increasing business revenue.
There is legitimate economic logic behind that argument. What matters isn’t simply the number of dollars the government owes, but the debt burden relative to the size and productive capacity of the economy.
Faster economic growth can make a large debt load easier to carry.
But that raises another question: Is growth alone enough?
And this is where the arithmetic gets uncomfortable.
Can economic growth outpace debt?
The nonpartisan Congressional Budget Office projects that debt held by the public will rise from about 101% of GDP this year to 120% by 2036. Over the same period, annual net interest costs are projected to grow from about 3.3% of GDP to 4.6%.
Economic growth certainly helps. But CBO’s projections already assume continued economic growth – and the debt burden still rises.
Now, don’t misunderstand me. I certainly hope that Bessent is right. I want a strong U.S. economy, an economy that is vibrant enough to handle and, ideally, eventually pay off the federal debt.
But growth doesn’t make the debt disappear.
America has now accumulated more than $40 trillion in federal debt. For economic comparisons, CBO focuses on the narrower measure of “debt held by the public” (excluding debt which one government department, like the Treasury, owes to another department, like Social Security). That public-debt number is roughly 101% of GDP this year – already around the size of an entire year’s economic output.
More important than the headline number is the direction: CBO projects that burden will continue growing rather than shrinking. Obviously, rising refinancing costs make the debt number compound faster…
I don’t think there’s much point in asking, “When will America pay off every dollar it owes?”
If you look hard enough, you can even find economists who argue (with a straight face) that paying off the U.S. national debt would cause an economic crisis of Biblical proportions. I happen to think they’re wrong, but that’s a different conversation.
Here’s the question we should focus on:
Can the economy and federal revenues grow fast enough (and deficits narrow enough) to keep the debt and its interest costs manageable?
Right now, CBO’s answer is not especially comforting. Its baseline has net interest costs more than doubling from a little over $1 trillion this year to $2.1 trillion in 2036.
Now, depending on how old you are, 2036 might make it sound like we’ve got plenty of time to solve this! I respectfully disagree. Keep in mind, that’s just 10 years from today. For comparison purposes, 10 years ago in 2016, the national debt was less than half today’s total.
Here’s the real problem: There’s no way to know, in advance, when “an awful lot” becomes “too much.” There’s no specific number that will make investors suddenly change their minds about the safe haven status of federal government debt. (Although central banks are already changing their minds on “safe haven” assets…)
It’s more like Ray Dalio’s “economic heart attack” metaphor. He describes federal debt in the economy to plaque building in a person’s arteries after a lifetime of double cheeseburgers on the sofa – over time, circulation slows down. Health declines. You know something should be done about it, but so long as there’s no emergency, there’s no urgency to get off the sofa and exercise… Unfortunately, by the time the situation reaches actual crisis, it’s too late to prevent it. Then you’re calling an ambulance if you’re lucky, and a hearse if you aren’t. Yes, it’s a scary metaphor! That’s the point.
There aren’t many painless ways to improve the math. Washington can restrain spending, collect more revenue, hope for stronger economic growth – or continue borrowing. Currently, the administration is pursuing all four strategies with varying degrees of success.
There’s another, sneakier, solution: Inflation can reduce the real value of debt over time – especially when refinancing costs are lower than the annual rate of inflation. But that is hardly a “free lunch” – inflation erodes everyone’s purchasing power. Persistent inflation can itself contribute to higher government borrowing costs, because lenders aren’t stupid. Who’d loan a government money at 3.5% when inflation is at the same level? The higher inflation goes, the more lenders demand to lend money…
Here’s the thing: Every path involves trade-offs. There’s no easy answer. That’s precisely why letting the debt problem grow year after year doesn’t make it go away – it just makes the solutions harder.
Large government deficits can add to inflation pressure too (but the relationship isn’t necessarily automatic).
The pandemic is a useful example. Federal Reserve researchers found that extraordinary fiscal support boosted demand for goods while production struggled to keep pace, contributing to inflation. (Supply-chain disruptions and other forces mattered, too – overall it’s a more complicated story than I thought at the time.)
Growing federal debt doesn’t inevitably create inflation. But it does make existing inflation pressures worse.
And here’s where the disagreement over why borrowing costs are rising becomes less important than the fact that they are rising.
Reuters explains that higher long-term government borrowing costs filter down into mortgage, auto loan and credit card rates. They also increase Washington’s own interest expense, leaving less room for other priorities without higher revenue, spending reductions or still more borrowing.
That creates an ugly feedback loop:
- Lender concerns can push borrowing costs higher
- Higher borrowing costs increase the cost of servicing the debt
- And those higher costs worsen the fiscal outlook that caused the concern in the first place!
Whether John Williams or the fiscal worriers have the better explanation, American households can wind up feeling the consequences either way.
We may not know which explanation for today’s higher borrowing costs will ultimately prove most important. What we do know is that persistent inflation, rising federal debt and higher borrowing costs can all put pressure on household purchasing power.
If that uncertainty concerns you, this may be a good time to learn more about diversifying a portion of your retirement savings with physical precious metals.
The dollar buys less today than it did a year ago, a decade ago, a generation ago. That slide is the predictable result of endless printing and borrowing. Dr. Ron Paul believes the FED has the answer. But they’re keeping it to themselves. Fortunately, a new financial chart has publicly exposed their secret moves. See it for yourself: https://freekit.birchgold.com/lf/ro...D_v02a_article&placement=article&cid=rp_media
To learn more about how physical gold could help protect your retirement portfolio, click here to get your FREE info kit on Gold IRAs from Birch Gold Group. And now introducing a Crypto IRA to capitalize on the fastest growing market in the world.
Tweet
Continue reading...
[ H/T The Burning Platform ]
