Will the U.S. Government Go Out of Business with Rising Interest Rates?
Bill Poulos holds an MBA with a degree in finance. He also earned a bachelor’s in engineering from GMI. He is Co-Founder and President of Profits Run, Inc. Bill Poulos shares technical analysis and well as personal views on relevant economy, investing, and market topics. Bill Poulos is an author, husband, father, and grandpa. For future insights, follow Bill on Medium or read one of Bill’s books on iTunes.
Our current monetary system is unsustainable but will the U.S. Government go out of business if interested rates go up? Potentially.
And what does it actually take in terms of monetary policy to drive good, sound, sustainable economic growth? A free market. The way the economy grows in the free market is unrivaled by other markets. No other kind of market can enable economic growth like a free market can.
For example, capitalism has lifted more people out of poverty than any other -ism known to man. Capitalism is an imperfect system but it’s the best we have. Capitalism is enabled by sound central bank policy, limited government, an appropriate level of government regulation, and sound tax policy.
If you create those conditions, the market will do its magic.
The Fed is a key player here through setting the short-term interest rates as well as indirectly controlling the money supply.
The Fed tries to create conditions so that there is an ever-available stream of credit — available to businesses and individuals. Businesses and individuals can then borrow money responsibly, at reasonable rates, to invest in new enterprises. This ends up creating new products. New products end up providing people jobs.
This flow ends up growing the economy in the most efficient way possible because if people invest in an imprudent enterprise, it’ll go bankrupt. That sends a message, don’t invest that way. It’s self-correcting. If they invest properly, other people and companies will see that and they’ll do the same, encouraging more productive investment.
When the Fed just dropped interest rates to near zero in response to the 2008 economic calamity the whole thing came tumbling down. (The 2008 economic calamity was abuse of the system by the banks and the government — pushing mortgages on people and companies that could not afford those mortgages — and then the banks collateralizing those mortgages, trying to sell them to other people on a highly leveraged basis.)
What was wrong there?
There was inappropriate level of regulation that allowed the banks and the government itself to act irresponsibly. The Fed, in response to save the system, dropped the rates to zero. That did save the system. It also saved banks that were unworthy of being saved, but nevertheless they were so called too big to fail.
However, there’s a dark side.
The zero-interest rate policy we have had for the last eight years or nine years, until just recently, promoted bad investment.
There has been a lot of bad investment going on in this country. Bad investments where people have run up debt levels that are not supported by any kind of returns they would get from that debt.
When you have zero interest rates it encourages you to invest in anything. It’s free money. That’s not good.
Right now, yeah, the economy is doing well.
But we’ve got a subprime auto debt problem in this country. The subprime auto debt problem is not a whole lot different than the subprime real estate problem back in ’07, ’08. No one’s talking about this issue. People are basically driving cars they can’t afford.
I’m just picking on cars. You name it, people are in debt up to their eyeballs mimicking their government — which is in debt up to its eyeballs. This has all been facilitated by the Fed’s zero interest rates policy.
Indeed, the real reason the Fed took rates to zero and has kept them there until recently is so that the federal government could afford to service its debt. In other words, when interest rates get back up to 4% or 5%, the government is going out of business.
The government will not have the money, no matter what the tax rate will be, to pay the interest on the government debt. The government deficit now well exceeds 100% of the GDP.
When you have a government debt and a public debt, we’re as a nation on an unsustainable path.
Something’s got to give in terms of the monetary system. The economy might crash at some point when the dollar collapses, but there will be a new monetary system in its place.
The economy will recover, and we’ll be off and running just fine, but not until there’s a cleansing or a catharsis that wipes out the current system because it’s just simply unsustainable.