Why High Interest Rates Won’t Work

Does it feel like, despite the markets hitting record highs, you’re spending more and more of your paycheck just to get by?

Every day, inflation chews up a bigger chunk of your paycheck, giving you less and less to put toward retirement.

It’s sending a whole generation of Americans into The Retirement Dead Zone — a place where you save money just to avoid losing your wealth.

Fortunately, it’s not too late to turn things around.

Contrary to popular wisdom, high-interest rates haven’t and won’t stop inflation.

So, we need to craft a strategy that anticipates the Fed’s next moves and the likely results.

What we’re about to describe goes against EVERYTHING you’ve been taught about economics.

Because the strategy we’re going to offer you is built on something better: common sense.

Not All Debt is Created Equal

The theory behind the high interest rate strategy can be explained using the following example.

Low interest rates

1. I have $12,000 a year to spend after expenses.
2. Interest rates are 0% annually.
3. If I take out a loan that I pay back in one year, I can borrow a maximum of $12,000

High interest rates

1. I have $12,000 a year to spend after expenses.
2. Interest rates are 10% annually.
3. If I take out a loan that I pay back in one year, I can borrow a maximum of $10,909.

Higher interest rates decrease the amount of money I can borrow to spend. Less money to spend means lower demand.

Lower demand with the same amount of supply means prices need to decrease to find an equilibrium.

In old-school economics, they’ll model this in a graph like the one below.

When the Fed raises interest rates, the cost to service debt (interest payments) increases.

This hits things like home loans, credit cards, vehicles, and other big ticket items.

So, why isn’t this working?

Take a look at the ratio of private debt to GDP.

This ratio compares the debt you and I hold relative to the economy.

It climbed right up into the housing recession when the average individual’s leverage was the highest it had ever been.

Since then, it has been on a steady decline.

In fact, despite higher interest rates, we spend very little of our disposable income on debt, as shown in the chart below that graphs household debt payments as a percentage of disposable income.

Meanwhile, this is the graph of public (government debt) to GDP.

Federal debt as a percentage of GDP spiked in 2020 when the government borrowed trillions for its stimulus program.

After a natural decline, the ratio has begun to tick higher. And it will keep going higher.

Despite record debt levels, higher interest rates aren’t impacting demand because they don’t affect the government in the same way they hit you and me.

When the government wants to, it can simply borrow more. And when no one wants its debt, it can buy its own debt (monetizing it). It can also raise taxes to increase revenues. On the rare occasions when there’s an adult in charge, it can decrease spending.

We can’t do that.

We can’t simply borrow more and more to pay back old loans. Nor can we magically increase our salaries or spend less money on food we need to live.

This is exponentially increasing the burden on our children and future generations.

The Inevitable

Where is this all leading?

Good news and bad news.

First, the bad news: interest rates aren’t going down anytime soon. In fact, they might go even higher.

Or, the Fed will need to decimate the economy to the point where demand falls because we’re in a recession.

Don’t think they won’t do it. Paul Volker pushed rates up over 15% in 1980 to break the back of oil, driving the U.S. economy into a deep but swift recession.

So what’s the good news?

There is only one solution to this problem – cutting spending.

Too much debt has built up on government balance sheets. That either needs to shift back to the private sector (which won’t happen) or be curtailed.

Cutting government spending is the only way to reduce demand meaningfully, which will finally bring inflation under control.

It’s a medicine long overdue and sorely needed.

However…there’s a catch.

To get to that promised land we’ve got to go through a lot of pain.

Tax hikes are coming swiftly and fiercely.

Imagine having even less of your paycheck to take home now, even as the price of basic goods keeps climbing.

And that’s just the start because Congress is dead set on taking money from one group in particular – the middle class.

Recent changes to retirement accounts, including 401Ks and IRAs, are making living our golden years in peace seem like a fantasy.

Thankfully, Bob Carlson, editor of Retirement Watch, has put together a comprehensive blueprint called the NEW AMERICAN RETIREMENT PLAN.

In it, you’ll find:

• A way to get 76% MORE on your Social Security payouts
• How to collect TAX-FREE payouts every month for life
• The do’s & dont’s of IRA investing in 2024

…and much more, including nine Special Reports from the members-only library.

Don’t let your retirement slip away.

Act now and pick up your copy of the NEW AMERICAN RETIREMENT PLAN!