Hi friends. I hope you had a great Christmas and will have a blessed and healthy 2023!
Today’s post addresses something many of you are likely pondering, namely our ever-growing national debt alongside our rapidly increasing government borrowing rate. What do you think the Fed will/can do looking ahead? I’m sure most of you feel we have to get government spending down and under control. I would concur with that thinking. But today, I’m wondering given our present course and debt situation, what do you think the Fed will/can do in the coming years?? The Fed has been the principal vehicle of monetary policy for a very long time.
It seemed we were coasting along with the growing mountain of debt while interest rates were hugging zero year after year. As long as interest payments can be made on time, some may have come to believe that refinancing the underlying debt is continually plausible. It’s like someone piling up credit card debt while continuing to make the monthly minimum payments. And it may even seem like any amount of debt is “no problem” when the interest rate is ~zero.
BUT things have changed. Interest rates have risen rapidly, making our massive 31.5 trillion national debt much more than a “no problem” issue. And if the Fed runs the printing press to enable debt expansion/higher interest payments, it exacerbates the inflation situation it’s trying to bring under control (by tightening). How easily it could all spiral out of control!
Don’t go HERE if you’re blood pressure is already high. The government’s projected numbers for future interest payments on its national debt are purely staggering.
So, where does the Fed go from here? I’d love to have you comment so I can read your thoughts.
Paul
When I think of the FED I think of the Johnny Cash song, “I Walk the Line.” A song about loyalty and fidelity. So, to what entity is it most loyal? The general economy, the elected administration, the U.S. Treasury, or its member banks. It has multiple relationships as it executes policies related to its dual mandate of price stability and full employment. So the idea of “most loyal” probably has some fluctuation to it depending on circumstances.
To me, the most critical aspect of economic life in this country is the solvency of the USA. And as I understand things the FED doesn’t really control that. They work with the conditions created by the budgets agreed to by the political process (negotiations between the executive and legislative branches of the federal government).
Politicians love the Keynesian theory because it provides cover for more and more spending while they ignore the part of the theory that recommends saving up during good times. Consequently, borrowing increases over time and debt becomes an issue. And what’s the easiest way for a government to reduce debt? Inflate it away.
Following the inflation of the 1970’s both inflation and interest rates (not the same thing but a lot of times they are somewhat positively correlated) began a general long-term decline. And following the stimulation that occurred in response to the GFC (great financial crisis) there were a number of forecasts of runaway inflation, but it didn’t occur. And the FED spent at least a decade trying to create inflation, trying to get it up to 2%. As the debt increases there is virtually no inflation to aid in inflating away the debt created by the continuous stimulus in the form of quantitative easing and low interest rates. So, the FED begins to talk about a policy of letting inflation run some above their 2% target. Then comes Covid and much more stimulus than occurred during the GFC.
And inflation does finally begin to tick up, just what the FED has said they want, and to justify delaying any move to squelch it they adopt the position that it is transitory. Then once it is evident to them, they began the two-fold steps of raising interest rates and withdrawing money from the system (quantitative tightening).
I’ve said a lot to say this, I think the FED stays the course of higher for longer, in order to keep U.S. debt service manageable. I don’t think they want to “crash” the economic system, but the debt burden is such that it will not be surprising to see a substantial period (several years) of below trend growth. Because as you suggest servicing the debt going forward will be of primary importance.
My thought is higher for longer. But that doesn’t mean they won’t slow down or pause from time to time and also reduce rates at times. In my mind they have to have enough inflation to help inflate away debt but not so much that interest on debt payments become an issue. And they have to manage to be not so tight as to wreck the economy.
Just like Johnny Cash, they walk a line, and like Johnny they step over the line sometimes.
Julian, my friend, I had to read and reread. Wow, those are some lucid thoughts on a complex theme. I really appreciate you taking the time to share your thoughts and hope others will note your commentary. I may have to write a special post to bring attention to your comments. Thank you!
Indeed Dr. Paul and Julian – thank you for sharing this. Much appreciated.
Thank you Julian for this post! And thank you Dr Paul! I found you back in 2016, and experienced some positive results utilizing your method of analyzing the balance sheet. After all this time, I have come back, eager to follow along on the journey here and hopefully soon find a company or two in the search worth investing in! Curious if you have adjusted any of the search parameters in conjunction with current times?
Hey Dustin. I make adjustments as needed. If I’m looking for a large company stock, I’m very unlikely to find any to meet my Adjusted Floor Scorecard price. But I can find some attractive ones that have quality balance sheets — which are the absolutely essential thing. That is, they will meet parts A and B, the quality standards, of my Scorecard. Accordingly, I might adjust the search by modifying the P/B to less than 2 or less than 3, for example.
If I’m seeking my favorites, the quality, very low priced prospects, the type described in my book, I’ll keep the P/B at less than 1, but relax the P/E, the P/S and perhaps eliminate the Insider Transactions filter in order to identify more possibilities. Small company stocks are usually the only kind to satisfy these parameters.
In no case, do I change the country filter. I’m stringent there, wanting the best regulatory setting behind financial reporting as possible.
Hope this helps.