top of page

What’s Up with Interest Rates?

Why are they not going down?  Are they not contributing the present slowdown in the housing market as mortgage rates once again exceed 7%?

Why can’t the Federal Reserve just lower rates?

Perhaps because it is not that simple.


Back in the days of coinage, all spending, including government spending, was literally limited by the physical number of coins on hand.  You would think that this would have prevented deficit spending, but no, governments always find a way to spend more than they should. With coins, overspending was accomplished via debasement. Starting with the Romans, governments would declare a certain type of coin to be the “legal tender” (based on shape, size, artwork, etc.), thus implying that they were fungible. And would then gradually reduce the percentage of valuable silver or gold in the coins, proving in fact, that they were not fungible.

It is safe to assume that the debasement of coins by private parties was not encouraged.

Over time these debased coins would lose value, but as the first spender after a debasement, which could be hard to detect, the issuing government benefited the most.  It took some time for the general population to figure out that they had been duped, and only then would the value of the debased coins lose their purchasing power.

Not all that different from today’s devaluation of the dollar.  Except that debasing a digital dollar is a heck of lot easier than debasing a metal coin.

The only remaining question is just how much debasement of the dollar American’s are willing to put up with?  While the often stated 2% target rate of inflation is possible, and maybe even economically optimal, if the population is willing to accept a higher rate, say 4%, then what is the hurry to reduce it to 2%?

After all, the higher the rate of inflation, the higher the deficit spending.

What is the upper limit for inflation?  At what point does it transcend from inconvenience to civil unrest, a historically common event?  And how long will the MMT “useful idiots” mislead the public as to the true nature of inflation, or suggest that “it is not really a problem”?


I wish I had a silver nickel for every time I heard a talking head on the business channels make a prediction as to “how many rate cuts there will be this year”.

The now know that the answer is, as recently suggested by Powell, none. Why? Because our federal government has a spending problem, which is overpowering the Federal Reserve’s attempt to reduce inflation via Quantitative Tightening, recently watered down from $60 to $30 billion a month.

Who could have predicted, (other than everyone), that deficit spending, which increases the money supply, is in direct contradiction to Quantitative Tightening, which reduces the money supply?

As I explained some time ago, the Federal Reserve does not set interest rates, it just influences them. The problem is that their influence is dwindling because their hands are tied while the amount of issued Treasury debt skyrockets. Interest rates are primarily determined by the secondary market for Treasury debt, and like any other financial assets, the price of this debt, inversely related to the associated interest rate, is solely determined by the demand and supply for this debt.

Let’s take a look at the supply of this Treasury debt, which has exploded since the pandemic began. In the first three months of 2024, the U.S. sold $7.2 trillion of debt, the largest quarterly total on record. That surpasses the second quarter of 2020, when the government was financing a wave of Covid-19 stimulus. It also builds on a record $23 trillion of Treasurys issued last year.

Disturbing that:

  • The economic damage from Covid was almost entirely self-inflicted.  We chose to shut down the economy, and then kept it shut down far too long.

  • Post Covid deficit spending was not required to fight a war, or to extract us from a depression.  No, for the most part it was just a combination of voter pandering and a shift to socialism.

Probably best that our economy does not slip into an actual recession, as we have no reserves.

What about the demand for treasury debt?

This is more difficult to directly analyze, but recent events suggest that it is tapering off.

On April 9, 2024, a sale of sale of $58 billion in 3-year Treasury notes came in worse than expected, the bid to cover ratio lower than expected.

Followed by weak demand on the April 10 $39 billion auction of 10 year notes, pushing the 10-year yield over 4.6%.

One could argue that as interest rates rise, treasury debt as an investment will become more attractive than stocks, and maybe this is already happening today, but here is the problem.  Today there is over 33 trillion of issued Treasury debt and the amount is growing, while the total market cap of all U.S. public companies is about $50 trillion.  In theory, if every investor sold 5% of their stock holdings and purchased treasury debt with the proceeds, this would transfer just $2.5 trillion, which is about how much new debt the U.S. government creates EVERY YEAR.

So no, there is not enough capital stored in all of the U.S. public corporations to bail out this debt market.

Ditto for all of the capital stored in all of U.S. real estate.

And the net worth of the top 1% is not even in the same ballpark.

Meanwhile, the government is poised to sell another $386 billion or so of debt in May alone…

Finally, a record $8.9 trillion of Treasury’s, roughly a third of outstanding U.S. debt, is set to mature in 2024.  This will have to roll over into new debt, the only question is how much, if not all, will roll over into higher interest rate debt, pushing up our payment on the debt?

Will depend on the supply / demand relationship at that time, but why did we allow ourselves to become so exposed?

Probably for the same reason that our nation’s strategic oil reserves are at 50% as ballistic missiles are flying in the Middle East.

This apparently is the new normal for now.


bottom of page