High Interest Rates, High Inflation, and Record Debt
Commentary
Financially, it’s going to be an interesting summer.
At the moment mortgage rates are hitting 7 percent, median rent prices are at $1,850 per month, and the average car payment is around $950 per month.
Household debt is currently at $17.1 trillion, mortgages are at $12 trillion, and auto loans are at $1.6 trillion. Soon, student loan payments are set to resume. All of this will create quite the ripple effect.
While it’s true, unemployment is lower than it was 20 years ago, maybe the era of cheap money put everyone in such deep debt that Americans are working two and three jobs to make ends meet.
The very dark cloud that has been looming over our economy is now turning into a perfect storm.
The economy has been overinflated, and now banks are tightening lending requirements. This is the beginning of a crippling hangover, from the decades-long era of cheap money. Now, due to rising rates, it is more expensive to borrow, and also harder to borrow, especially with the oncoming recession and credit crunch.
As we all know, inflation is the general rise in prices of goods and services over time. It means that the same amount of money will buy less and less as time goes on.
Everyone hates inflation. Even communists, who hate free-market economics, loathe inflation. It’s a topic everyone discusses, and when inflation hits, it hurts everyone, especially hard-working middle-class Americans. It decimates working people’s savings. Inflation decreases the value of people’s savings. It makes it more difficult to repay debt. It makes borrowing more expensive, and when rates rise, it’s more expensive to repay debt.
The Debt Ceiling
Prior to the debt ceiling agreement, there was talk of minting a trillion-dollar coin, or evoking the 14th Amendment of the Constitution to sidestep negotiations.
The trillion-dollar coin idea was proposed years back and while initially panned and ignored, the idea has picked up steam as a way to bypass Congress by minting a trillion-dollar coin, depositing it with the Federal government, and drawing down the amount as needed. Apart from the wonkish policy reading, it sounds third-world chaotic.
On the 14th Amendment, the rationale here is that the Biden administration would issue an executive order citing the 14th Amendment and direct the Treasury to continue issuing bonds.
The 14th Amendment of the Constitution states that “the validity of American government debt shall not be questioned.”
As The Economist stated, “the White House would, in effect, have branded the debt ceiling as unconstitutional, giving itself a free hand.”
Thanks for the confidence in economics and finance White House!
America is the land of the free, where anyone can be anything, no matter what background, race, class, or creed they are from. Let’s make sure we stand by that belief and keep the American government afloat, instead of pretending the debt ceiling negotiations are unfair. America needs a balanced checkbook.
Americas Upcoming Recession
As I stated many times before, it’s not just inflation that will tip an economy into the abyss of a recession. Confidence in a nation’s leadership and a lack of clarity surrounding policies and monetary policy can wreak absolute havoc on a nation’s finances.
In addition to the recent news that $4 trillion will be added to the national debt in two years, nearly everyone forecasts a recession. Today the Eurozone just entered a recession. And while the current political administration does not want to see a recession—it is nearly impossible to be re-elected while in a recession—the United States can’t be far behind Europe.
The recession call I currently agree with is the one according to ISI Evercore economist Ed Hyman: a “contracting money supply, credit tightening, a yield curve that has been inverted for six months and swooning leading indicators.”
That is a textbook scenario for a recession.
Last week, Deutsche Bank’s Jim Reid sent a note to clients stating: “The US continues to be on track for its first genuine policy-led boom-bust cycle in four decades. Our prediction is for a -1.25% peak to trough US GDP decline, milder than the average post-WWII recession, but aggressive versus the consensus.”
When you inflate an economy with policy to the point that inflation runs rampant and takes over, you can always count on a monstrous crash back to reality.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.
