Powell has a debt problem
Created on: 5/23/2022 6:54:16 PM   Last Update: 5/23/2022 7:33:27 PM Posted by: RTT

powell-has-a-debt-problemThe last time the US entertained debt this high (relative to GDP) was post World War 2.

The prior US high debt years were between 1936 and 1954, back then the public understood why the high debt existed (WW2) and why the public had to suffer high inflation to allow deflation of the debt to a manageable level. This question was not as political as it is today.   

Current US debt levels are the result of 'end of empire' spending, simply spending on steroids beyond one means. The FED needs inflation for the same reason as the post WW2 period to deflate away the debt.

The current political talk of 'fight inflation' will be short lived and the FED will be forced to accept higher inflation levels over the 2% (say between 4% to 6%). This change will be forced on them as the FEDs inflation fighting policies are currently breaking the credit and treasury markets (see via credit spreads and the Move Index).

The chart below shows a orange band (chart 3), this band represents a interest max of 3.25%. The US 10 year interest rate (black line) must not pass above if the FED wishes to avoid a crash in US debt and a run on the US dollar. After world war 2 the FED ensured this did not happen, back then they implemented yield curve control over the interest rate markets, even while high inflation (green line) periods persisted.    

The FED will be forced into some sort of yield curve control 2022+ and this will involve money printing and send the FED balance sheet to all time highs. 


Of course if interest rates can not be contained under 3.25% then the FED is going to have find a new tool to avoid a world depression.

New tool



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