The coming catastrophe
Excess debt will be dealt with. But will it be intentionally or unintentionally?
What a delight! A US presidential candidate, neither Democrat nor Republican, who has begun to address the important issues of our time. Robert F. Kennedy Jr has called inflation “the most pernicious and insidious regressive tax on the poor”, reports Moneywise.
In an interview with Fox News, Kennedy also laments high interest rates: “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 7.5% or 8%”, he said. Uh oh. Is he suggesting that interest rates should be held down by the Fed? Doesn’t he know that it was the Fed’s ultra-low interest-rate policy that caused today’s huge debt overhang?
Actually, Kennedy came up with a fairly original and interesting angle: he 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.
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 a Javier Milei, as in Argentina, or a 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. Joe Biden and Donald Trump are the front runners in the forthcoming presidential election. 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 recently when, following months of “range-bound trading”, the benchmark ten-year Treasury yield soared to its highest level since 2007 and briefly burst through 5%, reports MarketWatch. The tenyear rate – used as a benchmark for everything from student debt to car loans and mortgages – rose 3.4 basis points to end at 4.363%, or its highest level since 27 November. “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 $50trn by 2034 – so does the interest bill. It was $659bn in 2023, and next year it will approach $1trn.
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.
“If the problem is to be addressed, spending is the place to begin”