Ten years later
As far as we can determine, this month marks the tenth anniversary of the Monthly Budget Commentary. We began writing these pieces as a response to our own ignorance on budget matters and the dearth of impartial and sober analysis on the subject. The federal government was in the midst of then-unprecedented peacetime deficit spending, and the financial punditry was engaged in a spasm of inquiry concerning the sustainability of the dollar and where it would all end. Of course, many of those who fulminated mightily at the deficits of that time have been very quiet on the subject as of late. No “burdening our grandchildren” or “paying it back” rhetoric has been lately heard from the pulpits of Washington. One might even be fooled into thinking that these scare-tactics had been swept into the dustbin of history by the present embrace of assumptions underlying Modern Monetary Theory. However, we have no doubt that the ghoulish “deficit hawks” will once again rise and pollute the budget discourse as soon as political expediency calls them forth—precisely at the time when your humble correspondent is due to collect some return on his contributions to Social Security and Medicare.
But we digress. In 2010 the big question was when interest rates would return to “normal,” that is, 4-5%. The ballooning federal debt had lent some urgency to this—if rates were not raised soon, Washington would become trapped by the need to maintain historically low rates in order to prevent the interest due on the debt from reaching an unpalatable levels. Ten years on, this trap has swung shut—interest rates will not be going back to 4% without an earth-shaking change in the federal budget framework. The interest cost of returning to 4% rates would now total over a trillion dollar each year, for a government which even before COVID was running an annual deficit of a trillion dollars.
This is not to suggest that “we are doomed” or that the “national debt is unsustainable.” After all, the Japanese have engaged in just this “zero-percent solution” to the problem of high government debt for twenty years. We seek only to emphasize that the Fed’s policy options have narrowed enormously since 2010. Back then, the discussion of when interest rates would rise was the staple of every market analyst. The pronouncements of the Fed chairman were reverently scrutinized for clues as to the central bank’s intentions, and a will-they, won’t-they anticipation preceded every meeting of the Open Market Committee. The committee’s prepared statement was immediately dissected upon release and the slightest change of phrasing was made much of. Payroll reports were eagerly awaited by traders, and guessing the monthly jobs “number” correctly could make or break “market strategists.”
These days, none of those things matter. The monthly jobs report is still promulgated, to be sure, but has little impact on markets. Fed meetings are held and their minutes are painstakingly recorded, but no one much bothers about what they say. No one believes that the current Fed chairman will raise interest rates, or that his successor will be of a different mind. Nor does the bond market seem inclined to “fight the Fed.” We have slid into the numb, monotonous drone of near zero interest rates; nothing, it seems, will ever return us to the days of Four Percent.
Of course, there is a downside to this near-zero rate. After all, if very low interest rates are an unalloyed good, why didn’t we have them sooner? The answer, of course, is that they hurt cautious savers—those who wish to keep their wealth in high-grade bonds and bank deposits. Even a creeping 2-3% inflation will eat away at the real value of these assets over time—which makes saving for income needs far in the future (think retirement) problematic.
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