How do you know when a politician is lying?
His or her lips are moving.
And yet, Chairman Jerome Powell has been strikingly honest, even if dim-witted.
His latest comments confirmed what many of us suspected: The Fed plans to jack up interest rates until inflation evaporates.
Unfortunately, THAT’S IMPOSSIBLE.
But what does he care? What do any of the Federal Open Market Committee board members care?
It’s not like they’re ever held accountable for their decisions.
We pay this guy $200,000 to first ignore inflation and now blow up the economy, where the people who get hurt the most are the ones who can least afford it.
To be fair, the Fed is in a no-win situation.
No matter what actions it takes, we’re screwed.
Why, you ask?
Because our inflation problem doesn’t come from the Federal Reserve or the money supply.
It comes straight from Capitol Hill and 1600 Pennsylvania Avenue.
We’re not just saying that because Biden and meek Speaker McCarthy want to spend money like drunken pirates.
But you don’t have to take our word for it.
We’ll lay out the simple math behind the problem, discuss viable solutions and, more importantly, help you see how to transform this insight into an opportunity for financial growth.
Interest Rates Are a Two-Way Street
Let’s start with a practical question. What happens when interest rates go up?
- The cost of borrowing goes up.
- People save money instead of spending.
- The amount of money in the system declines.
Think about it in terms of investing.
In 2019, a one-year treasury note paid close to 0%. Right now, you can get over 5% on a one-year treasury note.
If you can get 5% on a Treasury note, which is about as close to a guaranteed return as it gets, why would you buy a stock for its 3% dividend payout?
You wouldn’t.
So, the stock’s price has to decline until the payout yield is attractive enough.
When the stock’s price drops, the size of the investors’ portfolios drops. In turn, those investors spend less money since the value of their investments shrank.
Similarly, companies in 2019 could borrow at 0.5% to pay for equipment that yielded a 3% return.
Today, that project would get shelved.
All of this makes sense. So, where’s the problem?
It lies with the borrowers. And no one borrows more money than Uncle Sam.
We’ve touched on the topic of government interest payments in a previous issue.
This was the Congressional Budget Office’s (CBO’s) projection for the next decade:
In 2022, net interest accounted for 9.7% of total revenues. That has skyrocketed to 13.3% in 2023.
Can you guess what happens when the Fed raises rates beyond the CBO’s projections?
Yeah, the interest payments get even bigger.
The only way to keep paying for this reckless D.C. spending is to lower interest rates, making it cheaper for the government to pay off its debt.
However, that induces inflation.
And thus, the Fed is left with a no-win situation.
But wait… didn’t Paul Volcker break inflation by just raising interest rates in the late ‘70s and early ‘80s?
He did…when our gross domestic product (GDP)-to-debt ratio was 32%. It’s 116% right now, folks.
By now, you’ve probably figured out how to solve this conundrum.
Surely it can’t be as easy as cutting government spending? After all, the president wants us to believe it’s the only thing holding our fragile economy together.
Here’s the hard reality of the situation: as a nation, we can’t keep spending like this.
Either we raise taxes to cover the shortfall, which transfers money out of the private market and into the public one…
…or we stop spending money like we won the lottery.
Look, no president or politician wants to tell the American public that they’re cutting spending or raising taxes.
Despite the romantic notion of a balanced budget, Americans are drunk on debt.
Love or hate him, when former Speaker Paul Ryan talked about changes to entitlement programs, he was excoriated as if he had said he planned to come for your firstborn.
Yet, we showed in our previous piece that diddling around the edges won’t be enough — not unless we want to jack up taxes by a third.
So, where does that leave us?
Because all this analysis means nothing if we can’t protect our wealth and act.
We need help from someone special… someone with unique insights and a deep knowledge of the Federal Reserve… a seasoned investor that knows how to read the tea leaves from Washington to the board room.
It just so happens that we know such an individual…
And the way he’s navigating this market flies in the face of everything you know.
