The Federal Reserve’s belief that economic growth can be achieved through high levels of debt and low interest rates seems to have had some unintended consequences. Both banks and consumers have taken full advantage of this mindset, accumulating exorbitant amounts of debt. However, now they are facing the consequences as inflation surges and interest rates rise.
Starting with the banks, they are currently grappling with enormous paper losses on the most opaque part of their bond portfolios. These losses have reached almost $400 billion, which is an all-time high and 10% higher than the peak at the beginning of the year. It is worth noting that this situation has already caused the collapse of Silicon Valley Bank. The rising interest rates are wreaking havoc on banks, especially smaller ones.
On the other hand, the Federal government is also feeling the weight of its massive $33 trillion debt load. As the Treasury yields rise, so do the interest payments on this debt, and they are increasing rapidly. This spike in interest payments is alarming, considering the already staggering national debt.
Moreover, American citizens are feeling the impact of rising interest rates as well. With the increase in Treasury yields, the 30-year conforming mortgage yield has gone up by a staggering 173% during President Biden’s term. This surge in rates makes it much more challenging for individuals to afford homes and adds to the overall debt burden of the population.
The US Debt Clock is providing a stark reminder of the magnitude of the debt crisis. Federal debt has surpassed $33.56 trillion, a staggering figure that seems to be of little concern to Treasury Secretary Janet Yellen. In fact, Yellen believes that the US economy is in great shape and sees no issue with funding military operations in Ukraine and Israel. Her confidence in the idea that unlimited money printing will solve any financial problems stems from her support for the Modern Monetary Theory.
In a surprising turn of events, multifamily rents experienced a downturn in September, with the average rent in the US actually declining by $6 from August and $3 during the third quarter. This marks the first time since 2009 that national rents have decreased in September. The hope is that this slowdown in rent growth will make buying a home more affordable compared to renting in cities like San Jose, San Francisco, Honolulu, Los Angeles, and Seattle.
It is disheartening to see how economists used to dismiss concerns about inflation, claiming it to be beneficial for devaluing massive debts. However, the reality is that inflation disproportionately affects the middle class and low-wage workers. Treasury Secretary Janet Yellen, often likened to the Nutty Professor, continues to advocate for unlimited spending and borrowing, oblivious to the consequences of such actions.
In conclusion, the Federal Reserve’s strategy of promoting economic growth through high debt and low interest rates has led to significant challenges. Banks, consumers, and the Federal government are all grappling with the consequences of accumulating excessive debt. Rising interest rates have caused havoc, with banks suffering losses and individuals burdened by increasing mortgage rates. The national debt has reached astronomical levels, and the Treasury Secretary’s reliance on unlimited spending is raising concerns. As multifamily rents decrease, there is a glimmer of hope for those aspiring to buy homes in cities notorious for high rental costs. However, it is essential to recognize the detrimental impact of inflation on the middle class and low-wage workers. Ultimately, a more balanced and sustainable approach is necessary to navigate the complexities of economic growth and debt.