On 23 October, the yield on the 10-year U.S. treasury bond broke up through 5 percent for the first time in 16 years. On 27 October, the average national interest rate on a 30-year, fixed-rate home mortgage topped 8 percent, according to Bankrate. The average credit card interest rate has reached 22 percent, the U.S. Federal Reserve reported.
High borrowing costs not only threaten consumers’ continued spending but also have already stagnated business investment, a key factor that will idle economic growth and job creation.
“If higher long-term [interest] rates persist, they could increase the risks of a broader and deeper [economic] downturn rather than a hoped-for soft landing, in which inflation cools without a recession,” The Wall Street Journal noted.
“The fear is that we get surprises of ever-higher yields,” economist Roger Aliaga-Diaz at Vanguard told the WSJ. “We still believe we’re not out of the woods yet in terms of a recession call.”
While consumers continue to spend, they have maxed out their credit cards and tapped their savings, as we have reported in articles such as “Americans Drain Their Savings to Keep Spending” (12 Oct 2022) and “Credit Card Debt Nears $1 Trillion, Sets Record” (7 Feb 2023). With consumer spending propping up more than two-thirds of the U.S. economy, any sustained retrenchment there will drop the economy into a recession.
Also, an 8-percent mortgage sets up “a new psychological threshold” for potential home buyers, chief economist Lisa Sturtevant at Bright MLS said to the WSJ. “The numbers are going to stop working for people.”
Thanks to higher rates, the U.S. government paid an extra $162 billion in interest during the fiscal year ended 30 September. That outpaced respective cost increases in Medicaid, Medicare, or Social Security, according to the WSJ.
Federal debt payments could triple to 6.7 percent of GDP by 2053, according to the Congressional Budget Office. That projection assumes interest rates average 3.8 percent in 2033 and 4.5 percent in 2053.
Greater federal borrowing can drive interest rates higher. As more government bonds flood the market, yields increase to keep attracting more and more buyers to buy more and more bonds. Bond yields rise as prices fall when more bonds pour onto the market.
“At some point, the bond market starts to cut Washington off, at least at reasonable rates,” Brian Riedl, senior fellow at the Manhattan Institute, said to the WSJ.
TREND FORECAST: Politicians live in fear of their polarized constituents. As a result, they are unable to bring themselves to take steps to rein in spending on Medicare, Social Security, and defense, the federal budget’s three chief cost centers.
As we learned in 2007, it takes a catastrophic fiscal and financial crisis for politicians to shake off their ideological straitjackets and work together to take bold steps to reverse a disaster.
If spending on defense, veterans benefits, Social Security, and Medicare remains untouched, all other federal spending would have to shrink by 85 percent to balance the federal books, according to a study by the private nonprofit Committee for a Responsible Federal Budget.
The Congressional Budget Office has offered 76 measures that could reduce the annual federal deficit, but they include ideas that both Democrats and Republicans oppose: erasing the last three tax cuts, major reforms to entitlement programs, raising taxes on the richest Americans, and enacting a carbon tax and-or a value-added tax.
Without a glaring fiscal catastrophe occurring, it remains unlikely that the two political parties in Congress can muster enough will among their members or in the public to do the hard work needed to bring the budget into balance.
We believe it will take a 2007-level emergency for Congress to cut spending, raise taxes, and balance the budget—or, better yet, to return a budget surplus that can be used to begin to pay down the national debt’s principal.