That’s my prediction. Yes I know, he who lives by the crystal ball eats lots of broken glass. Yet our national debt is exploding, and the deficit is only going to get bigger this year and subsequently (above and beyond the previously bad projections). So why wouldn’t interest rates rise with all this borrowing? Doesn’t economic theory suggest more borrowing against a fixed supply of saving leads to higher interest rates? Yes it does…

But of course we now have fully socialized interest rates, pretty much globally. The Federal Reserve is now committed to higher inflation, and that is the only solution. Inflation helps debtors at the expense of creditors, and–mirror, mirror on the wall, who’s the biggest debtor of them all? Yes, that would be our dear Uncle Sam. Now the Bible is clear that the wicked borrow and do not repay, yet that is surely the path we are on. After all, it is the path all nations take when they get deeply in debt–if they owe the debt in external currency, they default; if they owe the debt in their own currency, they debauch (inflate it away). We have Eight Centuries of Financial Folly demonstrating this. The Federal Reserve’s recent major policy shift of extended inflation after periods of lower inflation is only publicly stating what the reality always had to be–absent courageous politicians actually committing to run years of continuous budget surpluses. But in a Democratic Republic that would require the citizens to not demand something for nothing, which is something we do not see, at least reflected in what the politicians are pandering to in 2020.

Here is the simple reality–we always knew the debt is one day going to come due, it is just that Covid-19 has drawn that day in dramatically. Is it tomorrow? Next week? Next year? Who knows. When the global central banks are all committed to increased liquidity, and are willing to expand their balance sheets to crazy numbers to buy any amount of government debt, this could go on a while. The US government, for example, will not be willing to allow interest rates to rise. Let’s just use some very crude calculations for illustrative purposes. In 2019, the US had ~$400B in interest payments on a budget of ~$4.4T. Let’s say that we end up next year with $30T in national debt post-covid (and remember with the demographic tsunami we have trillion dollar deficits for a while regardless). If we are able to refinance all the debt at the recent 20 year rate of 1.2%, that will lead to “only” $360B in interest payments. The Fed’s dramatic lowering of interest rates, coupled with Treasury’s intent to lock in on lower rates, could have us ok. But what happens if interest rates rise to say 3.5%? Then interest payments would be over $1T per year–the increase being roughly the size of the defense budget. What if interest rates go to 6%? Then we’re looking at $1.8T in just interest payments. This would take over $2T of additional borrowing beyond the $1T of deficit borrowing unless politicians are willing to cut spending or significantly change the tax system. And despite the Democratic calls to tax the rich, that just doesn’t get you very far. To support higher spending you must tax the middle class extensively, as most of Europe does, through a Value Added Tax (VAT). And for some reason, politicians only think billionaires should pay tax increases. So, I see no will to exercise discipline, and therefore our central bank will do what all central banks are created to do–they will fund the sovereign. And we will get our middle class tax hike, but it will be through inflation.

Oh, and don’t forget how Federally-engineered low interest rates are crushing states who need higher returns to pay for their retirement and health care promises to the public sector unions. But don’t worry, we can just bail them out too. It’s totally fair for someone in rural America to have to pay higher prices on consumption goods because politicians in Illinois, Connecticut and New Jersey were all profligate. Don’t tax me, don’t tax thee, tax the fellow behind the tree.