The bond market isn't always right, but it's usually closer to the truth than some random speculator on the Internet (wisdom of the crowd, and all).
A simple bit of reasoning with the Federal government being in debt $33T - means that if rates were to forever stay this high - their interest burden would be AT LEAST $1.75T per year.
Current Federal tax receipts (minus payroll taxes) is $1.93T.
Either Federal Tax rates are going to ~75%, the government stops doing anything beside servicing debt, we default on our debt, or short-term Interest Rates eventually go back to ~0%.
Gee, I wonder which one people will vote for.
But for real I agree in general - where is the money going to come from? The interest on the debt and the federal receipts don’t work! I see the ratio (linked below) hitting 0.5 this decade.
What’s crazier is that % of GDP taxed according to the FRED is at historically normal levels dating back to 1950 - we’re not even at a point of low taxation relative to output.
FRED data
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Debt to GDP: https://fred.stlouisfed.org/series/GFDEGDQ188S
% GDP Taxed by Federal Gov: https://fred.stlouisfed.org/series/FYFRGDA188S
Interest Payments / Federal Receipts: https://fred.stlouisfed.org/graph/?g=sOG
Mass monetary creation and a higher tax burden are guaranteed. Spend less and hold assets? Work in healthcare?
We kinda tried that in Italy in the '70s/'80s. Spoiler: it didn't work. Globalized money markets can be assumed to be more reactive than public policy pretty much all the time now, so they will keep raising interest rates faster than governments can handle, more-than-countering expected inflation and making the debt spiral eventually unbearable.
Even Keynes expected to pay back (some) debts when the economy does well.
The yield curve has materially revised its long-term rate expectations over the last months [1]. The 30Y at 4% seems compatible with rates not "com[ing] down all that quickly."
> the Federal government being in debt $33T
It's closer to $18tn if we exclude debt held by the government itself [2]. (It still needs to be paid, but monetizing that debt is neutral from a cash flow perspective.) So about $1bn of interest payments per year to the public, which, assuming 2% inflation, is about $570bn today ten years out.
[1] https://www.bloomberg.com/markets/rates-bonds/government-bon...
[2] https://www.pewresearch.org/short-reads/2023/02/14/facts-abo...
I'm not a bond-pricing wizard, but if for N years, you expect short-term rates to be higher than long-term rates, that has to get priced into the long-term spread (putting it above the normal spread over the short-term durations).
This absolutely does not mean the market expects short-term rates of ~4% indefinitely.
250 bps is a high but precedented spread for the 30Y [1]. We're definitely in an inverted environment. Nothing in the curve suggests the market expects rates to stay high indefinitely. But they also do not portend any proximate massive cuts.
The ZIRP policies held for ~12 years probably created a lot of malinvestment due to kicking-the-can-down-the-road financing which will need to get cleared out in the next recession, when that recession hits, the Fed will slash rates again.
Nothing really fundamental has changed in the way the Fed operates, and it still has its 2% inflation target. They just increased rates at what was a pretty breakneck pace and are talking foldly of Volker. This isn't the post-WWII Fed that let inflation get up to 10% in the 70s. Most of the effects of inflation and rates were due to shocks caused by the pandemic, which are over now. I don't see why people think that inflation or rates have fundamentally changed.
Powell goes with what the market is pricing in, if you want to know what that is look at “fed funds rate” odds: https://m.investing.com/central-banks/fed-rate-monitor
I’ve been using that tool for over a year now and it absolutely will show what Powell will do. The odds will change as information enters the market but in general it’s spot on.
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch...
> I’ve been using that tool for over a year now and it absolutely will show what Powell will do.
>The odds will change as information enters the market but in general it’s spot on.
Sounds more like “it absolutely will show what Powell might do”. Also, Powell does not do it single handedly, there are 12 members on the Federal Open Market Committee that vote on setting the interest rate policy.
If you own a home already...
There is an insane supply problem and the fed's hand in the mortgage market doesn't make anything better. It's sensible for mortgages to all be ARMs, then rates will actually have a very real and unavoidable impact on home values.
We are now going to be stuck with this before covid and after covid homeowner situation. People who bought prior to 2022, and especially prior to 2020 will be death gripping their 2% mortgage, to the point that you could basically write off that parcel of land as even existing for the next 20-25 years.
Also, except for Miami every major city has had price decreases, so your personal anecdote is not what the stats show.
And in fact, at 10% inflation, if prices don’t rise, that means they are getting 10% cheaper in real terms. So in fact prices definitely are falling, no city has had a 10% price rise in the last 12-18 months.
Prices ran 20-30% in major markets and now getting pull backs of a few percent, mostly on the back of totally choked supply.
Raise rates all you want, if there aren't houses being put on the market, it's not going to do shit.
What long term predictions from the past accurately tell you today's rates? That is do you have any back testing?
Define "long run". Because over a few centuries the trend has been down:
* https://www.bankofengland.co.uk/working-paper/2020/eight-cen...
* https://www.visualcapitalist.com/700-year-decline-of-interes...
Why is it good for rates to come down: financing mortgages/cars/etc. comes down
Why is it bad for rates to come down: money market accounts/etc. won't yield ~4.75% for doing nothing
Anything I am missing? Do they weigh each other out perfectly? Is one a bigger deal/better/worse than the other?
Not necessarily, it depends on the principal cost as well. If principal costs increase in tandem with rate declines, the financed cost doesn’t necessarily change.
You’re missing the inputs into rates rather than the outputs from rates.
Rates mathematically represent the value of a dollar available today versus a dollar available in N years.
If we were to find capital intensive, large scale, low assessed risk, economically productive ventures tomorrow, we would expect rates to rise ceteris paribus as the dollars necessary for those ventures would compete with bonds for investment dollars today.
For example wide spread nuclear fusion, or some kind of rail infrastructure, etc.
In that sense secular declines in rates represent a society that has decided it has reached diminishing returns on capital, at least on a risk adjusted basis.
Similarly rates embed a consideration for default risk, or in the case of a bond denominated by the issuer currency risk. In this sense rates going up is bad.
There’s also the sheer debt and deficits governments run. Higher rates imply higher costs for both.
Which situation you want probably starts to encroach on your political leanings, subject to a few parameters.
[1] https://www.bloomberg.com/markets/rates-bonds/government-bon...
Neither did, by its own admission, the Fed.
For example, the yield curve inversion has had quite good predictive ability so far, and it’s predicting a recession. If you buy the fed’s data driven approach, that means its predicting rate decreases.
In that case the long term bond market’s prediction is supported more strongly than the fed’s prediction.