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Will the Chickens come home to roost?

| July 17, 2023

This is not clickbait, it’s time for a very serious discussion. Last week I discussed the record interest rate increases from the Federal Reserve, in their attempt to slow inflation down. If you remember what the FED was saying in late 2021 and early 2022 that inflation is ‘transitory.’ Then they let it get too far into the economy before starting to raise rates off the zero mark.

The definition of transitory depended on what your timeframe was. If you remember, we said if your definition was weeks or months, inflation was not transitory. If, however, your definition is more along the line of months or years, then inflation is transitory. I think we actually said at the time that we thought inflation would be elevated for 2-3 years. If you look at the chart below, we are now into the beginning of our 3rd year of inflation and look where it’s at.

Chalk one up for the good guys!

As you also know, we have been saying that the 2% inflation target the FED has set out is arbitrary and only causes more harm than good. We’ve said the long-term inflation has been around 3.25% over the last nearly 100 years. Makes sense that that could be a nice landing spot, not beating the economy into submission just to get to 2%. That remains out of our hands, but like we’ve said, if the FED wants to put the economy in a bad recession, they can. BUT IT’S NOT NECESSARY!

So, while the inflation rate has been coming down, we know that interest rates have been going up. Here’s a look at the treasury rates across different maturities.

And let’s look at the history of the 10-year treasury.

I marked that date above, because this is what our Treasury Secretary was saying (at the same time she was saying ‘inflation was transitory’).

1.65% on the 10-year Treasury. Yep, sure wouldn’t want to lock in those rates! Instead, we now have short-term rates in the 5%+ range and the 10-year close to 4%. What do you think that does to the budget of the US government? Yep, you guessed it. In addition to everything costing more, our interest payments are higher. Let’s take a look at the government budget. The fiscal year for the United States is October to September. So, we are now officially in the last quarter of the fiscal year. This is the budget from nine months ago (just published last Monday).

HOLY COW! $1.4 TRILLION DOLLARS IN THE FIRST 9 MONTHS OF THE BUDGET! Of course, all this does is add more to our already large debt.

Here’s how the budget breaks down across the different departments.

And here’s how the deficits look month to month.


Looks like we are generally spending more money per month this year than last year, and we didn’t even get the bump in surplus during April. Further, it looks like we are coming up to the largest deficit months of the fiscal year.

Let’s take a look at how the top budget lines are faring this year. These are all considered non-discretionary spending (meaning we have to pay it).

It looks like we’re on course for around $850 Billion in interest payments this year. $350 billion more than budget. Medicare, Medicaid and Social Security are also significantly above budget. How do we keep paying for this? If we are right and inflation stays in the 3%-4% range, how does the government budget for that extra liability?

Now, I’ve never said I was smart, nor has anyone accused me of that. But as far as I can tell, there are only two ways to fix this problem. Spend less or increase tax revenue. Some might only see the latter as “raise tax rates.” While that is an option, it certainly isn’t the only one. Policies that help us grow productivity are another. Political hotcakes like immigration, energy policy, infrastructure spending, and (yes) tax policy, etc. all can contribute to increasing or decreasing productivity. Increase productivity and you can increase tax revenue while still growing the economy. Seems like a win to me, especially if you can also slow spending growth below the rate of revenue growth. But let’s get back for a second to the idea of simply taxing more via increased rates, particularly on the wealthy – as we always want to tax the “other” people (not ourselves).

According to the Tax Foundation for the 2020 tax year:

So, the top 50% pay nearly all of the government’s revenue and the top 1% pay nearly a quarter of the revenue. I guess if we kept those numbers the same going forward, but increased the size of the revenue pie, then we could at least have somewhat of a balanced budget (or a deficit that is less than the growth in GDP).

But isn’t there something I’m missing? Oh yeah, now that you mention it. If we all pay more in taxes, we have less money to spend and invest. Wouldn’t that slow down the economy? I think that makes sense, though I’m no economist. By the way, you’re probably thinking that the top 50% of wage earnings in the country is a pretty good wage, right? Take a guess, DON’T CHEAT.

That is staggering. Now I guess I know why the bottom half doesn’t pay any taxes. We have said this in the past, we now have no easy choices to fix our debt problem. Maybe we did 10-15 years ago, but not now. This is not a political statement, as both parties have contributed to this problem.

Take a look at the national debt over time.

It really seemed to change slope after the GFC in 2008. Coincidentally that was the time when the FED decided they could keep the economy on life support with “free” money. Throw on top of that the “free” money we got as direct payments from the government (cash for clunkers, extended unemployment benefits, student loan forgiveness, etc.). You know the definition of insanity. Doing the same thing over again and expecting different results.

Since this is above my paygrade, I don’t know what the solution is, although I assure you it is not a simple, expedient one-click solution. It is multi-layered, and will require creativity, sacrifice, and effort from all. If we do nothing, the chickens will surely come home to roost.

I hope you have a great week and please let us know if you have any questions…