One of the often-ignored negatives about increasing interest rates is the effect they have on government spending. Higher interest rates hit the cost side of the government profit and loss statement hard. And the worst part about that, there is no positive repercussion from this spending. It’s just a black hole into which taxpayer money is thrown. Historically, this truth has an effect on what politicians believe they had to spend. This is why the Federal Reserve uses the Federal Funds Rate to control inflation, and historically it has been a great tool.
Unfortunately, politicians no longer seem to have this governor on their activities, and the deficit continues to grow. Worse, 2021 saw an increase in capital gains taxes of 67%. And like many people in other industries, Washington decided that this was in some way the new normal. But like anything, Washington, and many municipalities are seeing massive declines in tax collections this year as uneasy markets, real estate values, and inflation have hurt multiples on everything but the top few stocks.
So, what happens as deficits explode? Will ratings agencies continue to hold high ratings for government agencies? Will the government be able to fund defense programs? Educational programs? Roads? Bridges? Airports? Ultimately, the government’s ability to print money allows them to pay their debts no matter what. But at what cost? Full currency debasement? Can we continue to count on the USD to be less bad than other currencies?
While deficits do not create inflation directly, the deficits do ultimately affect our country’s debts. And if the solution to paying those debts does not come from the revenue side of the P&L, then we have no way to pay without more money printing and THAT will cause more inflation without stimulative benefits. Please contact your Congressional leaders, tell them if you’re tired of budgetary impasses. Tell them to work with leaders on the other side of the aisle. Compromise is what will ultimately improve this situation. This used to be in our nature… it should be again.
Source: The Wall Street Journal