The Fed cannot afford to blink in its fight against inflation, and the reason is oh so simple: the US government cannot afford to pay high interest rates for much longer.
Here are the oh so simple charts.
- Federal debt is now at 120% of GDP, the highest since 1945 when WWII required massive debt funding. No such reason today.
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- Inflation has caused interest rates to spike. Real rates (inflation adjusted) are deeply negative, so investors will soon start turning up their noses to US bonds - unless inflation goes down fast OR interest rates go up very significantly.
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Inflation (red) and 7-year Treasury yield (blue)
- With debt so high, the US simply cannot afford higher interest rates, definitely nowhere near 7-8%. It would, basically, cause the US to go bankrupt.
==> Therefore, the Fed MUST bring inflation down WHATEVER IT TAKES.
If you think the Fed will blink... good luck! Let me put it another way: a recession is one heck of a lot better than bankruptcy.
How do you refute this -
ReplyDelete"In 2023, $6.3T of publicly traded debt is coming due, and in 2024 another $3.2T - all rolled over at much higher rates? Really?? Anyone that tells you the Fed will take Fed funds to 5% and keep it there - is ignoring basic sustainable US Federal budget mathematics." - Lawrence McDonald
https://twitter.com/Convertbond/status/1602326094874660866
Thanks.
The proverbial doodoo is hitting the fan. Drastic solutions are needed but the Federal government is whistling past the graveyard.
Delete- The U.S. cannot afford higher interest rates. Agree.
ReplyDelete- The Fed cannot allow inflation any higher. Agree.
- But the only tool the Fed has to control inflation is the purchase and sale of bonds. i.e. higher interest rates, which the U.S. cannot afford. (QT effectively raises the interest rates)... not sure I follow... is this a really complicated way of saying that the U.S. will be bankrupt in 5 years time?
The Fed has to do its job to control inflation ASAP, and QT is absolutely essential. Yes, all other things equal QT will push interest rates higher.
DeleteBUT, in addition to monetary policy there is also fiscal policy, and Congress MUST wake up and slash the budget deficit to slash the need for more borrowing. ... I'm not holding my breath
have to agree on that. Its not really the Feds fault... the real problem is congress... or more particularly the people that elect congress...
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