Yeah, we hear ya. The whole world is discussing "higher for longer" and the Fed's commitment to keeping rates high to "fight off inflation" and "get the economy on track" again. Well, we are here to discuss reality
First - let's take a quick detour to reinforce one point that most, if not all, will scoff at and label as "extremist" or a "conspiracy theory". Folks, the Fed WANTS inflation, period. Yes, that is not a typo. The Fed MUST HAVE inflation. Think of it this way - what if the entire economy consisted only of $100? If we gave you a loan for $100 at 6%, then after a year we would expect to collect back $106. Well, the economy only has $100 right? So, where is the other $6 going to come from? Get it? The current system MUST CREATE NEW MONEY to survive. Apologies for the CAPS, but this point is extremely crucial.
Here are some other articles that may help with this concept:
The Fed Needs and Wants Inflation
Bitcoin's Purpose
This came across the Reuters wire recently:
YELLEN SAYS DEBT SERVICE COSTS WILL BE 1% OF GDP FOR THE NEXT DECADE. -Reuters
That is from Reuters so it MUST be true, right (sarcasm aside it did come from Reuters and is a quote attributed to the Treasury Secretary)? Let's reverse engineer some of that pesky and annoying math status quo huggers tend to find irritating. To keep it real simple and static, we'll assume the U.S. GDP is $25T. Ok, so 1% of 25 Trillion is $250 Billion
Yellen says that U.S. "debt service costs" will be 1% of GDP for the next ten years. To clarify, "debt service costs" are the annual interest payments made on U.S. debt outstanding. Yellen states that the annual interest America will pay on its debts will be no more than $250B a year. Hmmmm. If we use a blended rate of 6% (higher for longer folks) on $35T in debt (it grew by over $500 Billion in the last two months alone), then that is $2.1T in annual interest payments
The current rate environment says $2.1T in annual interest, but Yellen promised us a mere $250B in interest paid per year. So what gives? The below is a look at the trend in annual interest payments on the debt courtesy of the excellent work done at realinvestmentadvice.com
As seen above, the annual amount of money needed JUST to satisfy the interest payments on the debt of the world's largest and most sophisticated economy has gone parabolic, but the Treasury Secretary says all is well. Where is Yellen getting her math and what magical calculator is she using?
Before answering that, let's look at the next chart from REI again:
The chart above depicts how debt as a percentage of GDP has risen consistently and persistently since the late 1970's, but the level of debt service costs ("Interest Exp to GDP" in the image) has actually fallen up until the recent Fed rate hikes (most aggressive in history). This shows you very clearly that all is well and "everything is fine, move along" can work as long as the Fed artificially holds rates low. Please consider trying to avoid allowing Wall St Wizards and slick talking teevee "experts" to trick you into worshiping the Fed. Hold rates low artificially, politicians and "leaders" can spend endlessly and print money to keep the charade going. It's not some super secret math or scientific formula or invention "they" are hiding from you. They grift off the system.
Back to Yellen. Yellen says interest payments will only be 1% of GDP for the next ten years. Okie dokie. Of course, if this is true then Yellen is also telling you that the Fed will MASSIVELY and aggressively be cutting interest rates and holding them LOWER FOR LONGER
Let's do that math on a static snapshot of 2024. Assume 25T GDP and like Yellen says just 1% of that in interest payments. Well, that would be $250B, but the above chart shows you we are well beyond that and trending to $2T+ in annualized interest payments. This is because the absolute value of the debt is rising (need another post on this as it is rising banana republic style now actually) and the $2T projections are using the current interest rate environment
Yellen can't reduce the UPB (unpaid balance, or amount of debt outstanding), so that is 35Tish now. So how is she saying interest payments will only be 1% of GDP?????? There is only ONE POSSIBLE way for this to happen. Rates have to come down, and we mean they have to come down in a very, very big way
Fast forward five years. GDP is $40 Trillion. The yield curve is steep with short term rates below zero and long term rates capped by YCC at 2%. The blended rate paid on interest is 1%ish. That means $400B in annual interest payments. Yeah, that's a lot. However, it is much less than what it would be without intervention.
GDP $40 Trillion??? With the economy in the dumpster, how the heck is that gonna happen? Ahhhhh, the magic of inflationWhen the Fed folds for the final time and launches QE and YCC, inflation will pick up very aggressively and in a sustained manner. This will artificially inflate the NOMINAL level of GDP. This will create the perception that the "debt is getting under control" because the Debt/GDP ratio (a NOMINAL measure which "experts" will worship when they need it to work in their favor) will be flat-lining or declining.
Treasury Secretary is attributed and quoted as saying the burden of servicing the debt will not exceed 1% over the next ten years, so everyone take a chill pill
- Mathematically, the ONLY way this is possible is if rates come WAY DOWN and/or the unpaid balance drops precipitously (not happening, all debts are rolled over, not extinguished)
Fed will LOWER rates extremely aggressively when it folds and likely send short term rates below zero by 2025
Fed will launch Yield Curve Control (YCC - already been in use for more than two decades in Japan) and more or less at the same time to control long term rates and print enough "new money" to buy the bonds Yellen is selling
Fed will step in as the primary buyers of UST in recent decades are not in the mix for a variety of reasons (Russia had its UST stolen, you think they are coming back for more? Japan is up to their eyeballs in YCC. China's economy is a house of cards and they are shifting to more stimulus and will need cash to cycle back into propping up the Yuan.).
- Bonus Points: the Fed can say "hey we tried, it crashed the financial system, , looks like we need to keep rates a lot lower, oh just shut up and deal with it, btw the new 'inflation target' is 4%"
Consequently:
Rates DOWN
Inflation UP
Purchasing Power DOWN
Might make sense to exchange some fiat debt notes for things that could help one preserve and enhance purchasing power.
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