We’ve a situation here. Folks are on the market promoting the concept the Fed cannot keep rates of interest at 4.5% for long, and that it actually cannot hike rates of interest to five.0% or 5.5%, because the quantity that the federal government pays in interest expense is spiking and the federal government cannot afford to pay the spiking interest expense, and the Fed will need to pivot any moment now and cut rates of interest because otherwise the federal government would go bankrupt or whatever.
These items is now in all places, propagated by every kind of newsletters, and by bond fund managers and hedge fund managers which are losing their shirts with these higher rates of interest, and the pivot mongers have grabbed a hold of it, they usually’re on TV with these items, pushing the concept the Fed must cut rates of interest or else the federal government will go broke or whatever.
What these pivot mongers are willfully omitting is that tax receipts – which pay for the interest expense – have spiked by an enormous amount, and that interest expense as a percent of tax receipts had hit a historic low in Q1 2022, and has ticked up from that historic low but stays near historic lows. Interest expense as a percent of tax receipts is the first measure of whether or not the federal government can afford the interest expense: It was around 50% within the Nineteen Eighties; in Q3 2022, it was 22.9%:
The thing is, inflation has been huge. Inflation signifies that government tax receipts are spiking, thereby lowering the burden of paying for the prevailing debt, thereby allowing the federal government to borrow more since the burden of the old debt gets extinguished by surging tax receipts resulting from inflation, which is why governments love inflation.
But inflation is an enemy of the people. And when inflation rises beyond certain low-ish levels – the Fed thinks that’s about 2% per its core PCE measure – it would ultimately tangle up the economy, resulting in every kind of long-lasting damage. And that puts the brakes on the federal government’s wishes to inflate away the outcomes of deficit spending, namely ballooning debts and interest expenses.