The Federal Reserve is a creation of Congress. It was given two mandates having to do with maximum employment and price stability.
It was certainly not created to bankrupt the United States. But as the Fed raises interest rates, it’s also raising the U.S. government’s already unpayable debt burden.
The Fed’s ability to raise interest rates to tame inflation is constrained by this strictly limiting consideration: it simply can’t let higher interest rates mushroom the debt burden for long. On the contrary, the only way for the government to get a handle on its debt is to inflate it away.
This unpleasant reality is something the Fed will be forced to confront before long. While it spells a grim fate for the dollar, it makes a powerful case for gold ownership.
We have been commenting on this for a long time, that the cost of servicing its debt will put a ceiling on any attempts by the Fed to rein in inflation. We’re pleased to see the Wall Street Journal address the Fed’s dilemma as well.
Here is the headline and lead:
U.S. Paying More to Borrow as Fed Raises Rates, Inflation Stays Elevated
Interest costs on national debt are up 30% this fiscal year and could increase more
“Yields on U.S. Treasurys are rising as the Federal Reserve lifts interest rates to try to cool inflation, a development that could increase the federal government’s borrowing costs over time to levels higher than currently projected.
Government spending on net interest costs in the fiscal year that began last October totaled about $311 billion through May, a nearly 30% increase from the same period a year earlier, according to Treasury Department data.”
Interest on the federal debt currently accounts for 2.5% of GDP. By the time normalizing interest rates on the U.S. debt portfolio rise to 5% of GDP, approximately the range during the Reagan years, interest on the nation’s debt will spike to $1 trillion annually.
Meanwhile, capital losses have replaced capital gains for stock and crypto investors. Couple that with a developing recession, which will also suppress tax revenue even as social spending spikes, and the deficit looks to widen dramatically, even before the expense of continually rising interest on the $30.4 trillion national debt.
Here is a chart of the rising yield on the U.S. 10-year Treasury over the past 12 months. From its low yield of 1.19% in August 2021, it rose to 3.49% in mid-June. That’s an increase of 2.3 percentage points.
You’ll note that the yield steepened its climb in March. That’s when the Fed began raising its benchmark policy rate from near zero to a range of 1.5 to 1.75%. Although another rate increase is expected from the Fed’s July meeting, the real Fed funds rate still remains deeply negative, about seven points below today’s 8.6% inflation rate. Yet, wringing inflation out of the U.S. economy, at least according to the Paul Volcker model from the last inflation crisis 40 years ago, demands raising interest rates well above the inflation rate.
Jerome Powell’s rate increases aren’t even close.
Former Congressman and gold authority Ron Paul joins us in pointing to limitations on the Fed’s ability to raise rates:
Increases of a couple percent or less in interest rates can cause big increases in federal debt payments. The resulting new spending puts pressure on the supposedly “independent” Fed to maintain low rates, making it more likely the Fed will fail to tame inflation but succeed in resurrecting stagflation, combining price inflation with a recession. This new stagflation will make the 1970s look like a golden era.
Despite the skyrocketing debt and the Fed’s role in creating inflation, there are few in Washington committed to spending cuts. Congress is currently getting ready to authorize an across-the-board spending increase for next year. Meanwhile, the US government is spending tens of billions of dollars this year related to Ukraine, and the Biden administration is still pushing for massive new domestic programs.
The evaporating purchasing power of the dollar is a calamity that can no longer be overlooked.
Newsletter writer Bill Bonner notes that “by long tradition, now almost an instinct, people buy gold when they fear that the paper currencies may not be as stable as they had thought.” That would explain why the United States Mint keeps reporting record demand for its gold coins, including the popular American Eagles. It also explains why the respected London-based precious metals research consultancy Metals Focus calls U.S. investor demand for minted silver retail investment products “almost insatiable.“
We don’t know how much longer Wall Street speculators and hedge funds can keep selling gold-substitute paper products as a means of struggling with their massive stock and crypto losses, but we are grateful that their actions are providing us a window to acquire precious metals at preferred prices despite the record demand.
If you’d like to invest, let us provide you with a free one-on-one consultation.
The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.