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This administration was handed a fiscal mess, and with that a difficult path. Our debt/GDP is in the neighborhood of 120%, the level of an emerging market in crisis, held together by the U.S. dollar still being a major reserve currency and trade currency, as well as the importance and relative stability of our economy and financial markets.
Our government continues to run massive deficits — the type you might see during a recession or war, not during a time of GDP expansion. And we are now in a place where interest expense on our national debt exceeds our spending on defense. As historian Niall Ferguson’s eponymous Ferguson’s Law says, “any great power that spends more on debt servicing than on defense risks ceasing to be a great power.”
Given that higher interest rates beget higher debt servicing costs, and that we have an increasing amount of debt to finance, as well as trillions of dollars in debt to refinance this year, President Donald Trump is right to be concerned about interest rates.
But there is no free lunch.
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Kevin Warsh, former governor of the U.S. Federal Reserve, during the International Monetary Fund and World Bank Spring meetings at the IMF headquarters in Washington, D.C. on Friday, April 25, 2025. (Tierney L. Cross/Bloomberg via Getty Images)
While the Fed has lowered its target interest rates, that more directly relates to interest rates at the short end of the yield curve (that is, short-dated Treasury securities). The market controls the long end of the curve (that is, longer-dated Treasury securities, like the 10-, 20- and 30-year maturities). And we have seen that those yields stay stubbornly elevated.
Ultimately, there will likely need to be some form of yield curve control (measures that bring and hold down the longer-term bond yields). If we continue to see our interest expenses rise, that will drive a larger deficit. That means more debt financing, which will drive up yields, make interest again more expensive and create a debt spiral until the U.S. and global bond markets are thrown into turmoil.
But, as we have seen with Fed meddling and government overspending, there is a cost to Fed intervention. The price paid will likely continue to inflate assets (on a nominal basis). While we need this because the value of stocks and housing decreasing over a period of time would likely directly and indirectly lead to a decrease in government receipts (aka tax revenue), it has the same effect on increasing deficits and exploding the cost of debt. This again means that some action will be taken.
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This is also why the positioning of Fed Chair appointee Kevin Warsh as a hawk (one who prefers tighter Fed policy) vs. a dove (one who prefers looser monetary policy) doesn’t really matter. Our fiscal situation and basic math will force him and the Fed to intervene in markets and lower interest rates one way or another.
The price paid for holding our fiscal house together will likely be inflation. This will continue to erode the purchasing power of the U.S. dollar and drive a bigger wedge between the wealthy and the middle class in America.
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But intervention is only a temporary solution. It buys time, but it doesn’t solve the problem.
Unless government spending is reduced, not only through lowering interest expense, but across all categories, or growth is so massive that in either scenario the deficit is eliminated, the core problem doesn’t go away. It just gets held back for a short period of time and then we will be in the same situation again.
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Our government continues to run massive deficits — the type you might see during a recession or war, not during a time of GDP expansion.
And, if you are familiar with Congress, there doesn’t seem to be any political will from either of the major political parties to spend within an actual budget.
So yes, interest rates are a problem, as is government spending. Warsh will be forced to help, whether he likes it or not, and we will all pay a price.
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