Addicted to Rising Debt and Falling Interest Rates

 

This chart shows the 10-year Treasury bond yield compared to the inverse of our economy’s total debt securities and loans. It is not a coincidence that they are clearly highly correlated. They are our two linked financial addictions. Our debt is growing exponentially as our interest rates decay exponentially. Can’t really have one without the other.

In theory, our debt can approach infinity if and only if interest rates approach zero. This keeps our “what do you want your payments to be” economy in balance for business, home, and auto loans.

In practice, Japan’s debt is approaching infinity as their interest rates remain zero. We’re following their lead.

For two decades, we’ve been listening to the experts talk of normalizing interest rates. My reaction remains the same. Interest rates are normalized. They’ve been normalized for 40 years. As our debt goes up, interest rates must come down. If interest rates don’t eventually come down, the economy collapses.

We all know this. The whole world knows this. Just imagine what a 6%+ yield on the 10-year Treasury bond would currently do to the housing market. Housing would implode. We saw a yield this high in 2000. 2000 is over though. It’s 2021 and our debt is so much higher now. Can’t live in the past.

For those worried about inflation, we’re so addicted to debt that 4% Treasury yields should be more than enough for a major deflationary event, especially with the stock market’s current level of exuberance and so many people parsing every word out of Powell’s mouth for any signs of tightening.

The party can continue as long as debt rises to stimulate this economy and interest rates fall to stimulate this economy. Don’t think of our economy as a patient in the intensive care unit. Think of it instead as an addict with stimulants in both hands. Over the long-term, this can’t end well. It has has worked for 40 years so far though, so good luck betting on the timing. In the meantime, stimulated life goes on.