Interest Rates
At this time 2 years ago, short-term interest rates were higher than long-term rates. This is known as an “inverted yield curve”. At the time, many pundits and money managers (me included) felt there were elevated risks for a recession within 6 – 12 months. This is because an inverted yield curve has historically been a reliable predictor of recessions in the United States. Since the 1970s, EVERY U.S. recession has been preceded by an inverted yield curve, with a total of seven instances during this period. However, not all inversions have led to recessions; for example, mild inversions in the past did not result in economic downturns. The inversion that ended in December was the longest in recorded history, lasting over 27 months
Recession and Our Debt
And yet, no recession. Why? I believe it is because of the tremendous amount of money the U.S. government pumped into our economy during Covid and beyond. Without this stimulus, I am quite sure a recession would have occurred.
As a result, we now have over $36 trillion of debt and paying interest on the debt will soon be the largest line item in our budget. It’s already larger than Medicare and Defense spending, and in fiscal year 2025, net interest payments are projected to reach $952 billion, which is close to becoming the largest budget item.
Printing money to cover those interest payments is one option because if we make the interest payments, we haven’t technically defaulted. But this causes inflation, which goes against the Federal Reserve’s mandate. And, if we go into a recession, revenue to the Federal Government will decrease, making the need to borrow even greater. We could raise taxes, but that can slow the economy too.
The Trump Administration has chosen to tackle this issue head on by “cutting waste, fraud, and abuse” through the creation of the Department of Government Efficiency or DOGE.
The Markets
Politics aside, the changes that are being made by DOGE, and the implementation of tariffs, has caused the one thing markets hate the most – uncertainty – and this has resulted in a sharp selloff in the U.S. Equity Markets. Are we headed for a recession? We’ll see. But even before the new Administration took power, we were ripe for some sort of correction.
The Bottom Line
We’ve painted ourselves into a corner but as far as I’m concerned, the bottom line is this – as a nation, we must spend less than we take in – period! It won’t be politically, fiscally, or monetarily easy to get things under control, but right now we have choices. Soon we won’t.
