In mid-2008, our Federal debt was about $9.5 trillion. Today, it is about $35 trillion.
In mid-2008, 10 Year Treasury Yields were just under 4%. Today, 10 Year Treasury Yields are just under 4%.
So, we added $25 trillion of federal debt and rates are about the same as where they were in 2008.
My Point? Doomsayers frequently tell us that the onslaught of Treasury debt and government borrowing will push rates way up.
But the last 16 years prove them wrong, per George Gammon. We’ve increased our debt by $25 TRILLION, and rates remain low!
The bond market sets rates based on growth and inflation expectations – and the excess supply of Treasuries/bonds is NOT bringing rates down. There is an almost endless demand for Treasuries – even without Quantitative Easing, as Gammon explains here.
So no, I don’t expect the coming onslaught of government borrowing and Treasury bond sales to push up rates.
This year alone saw a record issuance of debt by the Treasury – and rates have fallen almost 2% since last October!
Sidebar: Rates Will Soon Start to Trend Downward Again
In yesterday’s blog, I mentioned that rates often go up after the Fed cuts rates – and, in response, I received questions about how long they will stay up. I think the increase will be short-lived, and I expect rates to start to fall again soon and to continue to trend downward through the end of this year and through next year. Rates are already trending downward today in fact, and the odds of a 1/2% rate cut in November are way up because inflation is cooling.
Won’t Deficit Spending Fuel Inflation – And Then Push up Rates?
“But Jay, deficit spending is inflationary!” Not so much, per economist Steve Hanke.
This is because when governments have to borrow to spend, per Mr. Hanke, they are sucking as much money out of the economy (to borrow) as they are injecting into the economy.
“But Jay – what if there’s Quantitative Easing or QE?” When the Fed is buying the debt directly instead of letting outside investors buy it, it can be inflationary. BUT remember, we saw ample QE numerous times after 2008 with NO inflation.
If there is QE along with ample bank lending, per Mr. Hanke, we will see inflation – as bank lending (NOT the Fed) creates most of our new money.
“But Jay – we have seen tremendous inflation since COVID…” Yes, and it was a result of QE, lots of bank lending (mortgage boom, commercial lending, consumer lending), supply chains getting shut off, and direct payments from the government to consumers.
It is unlikely we will see that combo of events in the near future.
Final Point: Europe, Japan, and China Have Far Worse Debt Problems than the U.S.
Peter Zeihan explains in this very short video (skip 1st 2 minutes) – Will the National Debt Kill the US Economy? – that we have a good 30 years before our debt becomes a major problem (think Japan).
It is because other countries are so much more indebted than we are, and because we have the world’s reserve currency.
