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This administration was given a financial chaos, and thus a difficult one. Our debt/GDP is in the region of 120%, an emerging market level in crisis, held together by the US dollar still being the main reserve and trade currency, and the relative importance and stability of our economy and financial markets.
Our government continues to run huge deficits – the kind you’d see during a recession or war, not during a GDP expansion. And now we are at a point where the interest costs on our national debt exceed the money we spend on defense. As historian Niall Ferguson’s eponymous Ferguson’s Law states, “any great power that spends more on debt repayments than on defense risks ceases to be a great power.”
Given that higher interest rates cause higher debt servicing costs, and that we have an increasing amount of debt to finance, and billions of dollars in debt refinancing 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 US Federal Reserve, during the International Monetary Fund and World Bank Spring meetings at the IMF headquarters in Washington, DC on Friday, April 25, 2025. (Tierney L. Cross/Bloomberg via Getty Images)
Although the Fed has lowered its target interest rates, that is directly related to interest rates at the short end of the yield curve (ie, short-term Treasury securities). The market dominates the long end of the curve (ie, long-term Treasury securities, such as 10-, 20- and 30-year maturities). And we’ve seen that those yields are consistently high.
Ultimately, there may need to be some form of yield curve control (measures that bring and hold long-term bond yields). If we continue to see interest costs rise, that will create a bigger deficit. That means more debt financing, which will raise yields, make interest rates more expensive and create a debt bubble until US and global bond markets are in turmoil.
But, as we have seen with Fed intervention and government overspending, there are costs to Fed intervention. The price paid will likely continue to increase the asset (on a normal basis). Although we need this because stock prices and housing declines over a period of time may directly and indirectly lead to a decrease in government receipts (tax money), it has the same effect on increasing the deficit and exploding debt costs. This also means that there are steps to be taken.
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This is also why the appointment of Fed Chairman Kevin Warsh as a hawk (who prefers a tight Fed policy) versus a dove (who prefers a loose monetary policy) doesn’t really matter. Our financial situation and fundamentals will force him and the Fed to intervene in the markets and lower interest rates somewhat.
The price paid to hold our financial house together will likely be inflation. This will continue to erode the purchasing power of the US dollar and create a greater disparity between the rich and the middle of America.
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But intervention is a temporary solution. It buys time, but it doesn’t solve the problem.
Unless government spending is reduced, not just by lowering interest rates, but across the board, or growth is so great that in any case the deficit is eliminated, the main problem doesn’t go away. It is only held for a short time and then we will be in the same situation again.
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Our government continues to run huge deficits – the kind you’d see during a recession or war, not during a GDP expansion.
And, if you’re familiar with Congress, there doesn’t seem to be the political will from the other major political parties to implement it within a real budget.
So yes, interest rates are a problem, and so is government spending. Warsh will be forced to help, like it or not, and we will all pay the price.
CLICK HERE TO READ MORE FROM CAROL ROTH
