I. Agents and Loan Officers Have No Idea How Lucky They Are Right Now – Because the Economy Is So Weak!
The 10-Year Treasury yield is over 4.7% – a level we saw in 2023 when inflation was raging. But – that yield would be far higher if there were not three very clear signs of economic weakness:
- The job market is very weak. The most recent nonfarm payroll report was negative, and we’ve lost about 1.5 million full-time jobs over the last year.
- Retail sales declined in July. This is serious because America is driven by consumption, and the retail sales numbers are not even adjusted for inflation. If they were, the numbers would be even worse.
- GDP growth is slowing. It fell from 2.1% in Q1 to 1.5% in Q2.
The average mortgage rate is pushing 6.8% today, driven almost entirely by inflation concerns.
This is a reminder, though, that the bond market (that controls long-term rates) reacts to both inflation concerns and growth expectations.
The weak economic data discussed above signals slower growth, which is keeping rates far lower than they otherwise would be.
In addition, if the spread between mortgage rates and the 10-Year were back at 2023 levels, the average mortgage rate would be close to 8%.
Lucky indeed. Or at least a reminder that things can always be worse…
II. An Aggressive Billionaire Tax Would Lower Rates a Lot!
There is much talk about a proposed billionaire tax – or a tax against assets/wealth over and above one against just income.
And an aggressive billionaire tax at the Federal level would likely lower interest rates a lot – for a few reasons:
- It would be seen as a serious effort to lower our federal deficit.
- It would significantly slow economic growth.
Here are a few reasons why it would slow growth so much:
A. It would crash the markets. Billionaires don’t keep a pile of cash in a giant vault like Scrooge McDuck. Their money is invested – and largely in stocks. A large asset tax would force billionaires to liquidate their stocks en masse, and that would drive prices way lower. And given how much the stock market influences the American economy, significantly lower stock prices would impair growth.
B. It would inhibit future investments. Every time a tech founder becomes a billionaire, he will go broke… This is because all of his wealth will be in stocks, and he’ll have no cash. So, he’ll have to sell his stock in an illiquid market, rendering both him and his company more broke. This will make venture capitalists think twice about how they invest – and it will make them want to avoid creating billionaires.
C. THE BIGGIE: Governments don’t create wealth. They just consume it. If governments could create wealth, the Soviet Union would still be thriving. Politicians – in what is the greatest con job of all time – have convinced Americans that all government spending is “stimulus” when it is really just borrowing to spend – like a drunken sailor using credit cards to buy fancy cars and big-screen TVs instead of spending on college or training to increase his future income. There is stimulus temporarily – until the bill comes due.
Moving all the productive billionaire capital to the government would wipe out the investment capital that has propelled our enormous wealth and productivity gains over the last century. Capital needs to be employed to create more stuff – not to be spent.
Irony: Rates will shoot higher in the long run as a result of a billionaire tax. This is because it would slow growth so much that tax receipts would ultimately plummet – forcing the government to print even more money to cover expenses. That would fuel inflation and higher rates.
Exception: Chris Whalen’s One-Time Billionaire Tax.
Conservative analyst Chris Whalen supports a one-time wealth tax to pay down the deficit because asset gains have been driven by the same inflation that has ravaged lower economic rungs.
It would only work, though, if all revenues went to pay down debt and federal spending were frozen. If not, Congress will just spend the money and come back for more.
