Out of Control Fiscal Spending Will Cause The Fed To Take Fed Funds To Zero Percent
Long Yields Will Move Lower Before Deficit Spending Forces Long Yields Higher
Year-to-date (as of June 30th), the United States Treasury has spent $682 billion paying down the interest on the $35 Trillion in Treasury debt outstanding. The $682 billion is the second largest expense item behind Social Security at $1.09 Trillion. The exorbitant interest expense is why the Fed will be forced to take its Fed Funds Rate down to zero percent in 2025.
Further down the line the Treasury market will force fiscal austerity on the United States should Congress continue to run $2-3 Trillion annual deficits. At some point institutional investors and sovereign wealth funds will not be willing to hold long maturity Treasuries with yields in the 3-4% range. Yields will have to move significantly higher to entice investors. I can assure you that an 8% yield on the 10-year would grind economic activity to a halt, including Federal deficit spending.
Before then, Americans will be jammed with higher taxes regardless of who sits in the White House in 2025. Higher tax revenue to the Federal Government will do nothing to cure the United States’ spending and debt problem, yet this will happen.
Citizens could vote out of office any Senator or House member that approves ANY spending bill. That would send a powerful message. However, my fear is that the average American will not take action until day-to-day life gets worse. Perhaps if real world prices continue to rise over the next 5 years at a similar pace as the past 5 years, people will take action. The scary thing is that when this turns south, that is to say when the Treasury market tells Washington D.C. “Fu*k You”, it will happen without warning. It will happen overnight. It is a problem that the U.S. will not be able to spend its way out of.
