Debt may doom the dollar
Interest rates climb
Gordon L. Weil
Nine out of ten Americans are in debt. The federal government, just having crossed $40
trillion in debt, owes more than all individuals together.
Interest rates are rising.
The more people or the government must pay on their debt, the less
affordable is everything else. The
federal government allows itself to keep piling on more debt to be repaid sometime
later. The problem is getting bigger.
Republicans traditionally fought to control debt, while
Democrats were seen as big spenders. Compromises
between them kept some limit on the federal debt. But the GOP has changed; it openly supports
increases in the federal debt by spending more and taxing less.
Debt affects everybody and could be the major threat to the
American way of life. It affects all
costs from mortgages to groceries. The
more businesses and farmers pay for the loans they need to operate, the higher
the costs they must pass on to consumers.
President Trump wants lower interest rates. Rate cuts are politically popular, and he believes
lower rates will reduce the amount of huge government interest payments resulting
from massive federal deficits. He wants
the Federal Reserve, the central bank which sets short-term interest rates, to be
the driving force to lower the long-term cost of federal debt.
The Fed’s Open Market Committee sets interest rates, based
on economic not political factors. Its goals are low inflation and full
employment. It has not cut rates to Trump’s
satisfaction. He attacks the Fed, but the
Supreme Court has upheld its independent role.
Trump blames former Fed Chair Jerome Powell, his own appointee,
for not cutting rates. When Powell’s term
as chair ended, Trump replaced him with Kevin Warsh, who might be more
favorable to his goal. At the outset,
Warsh was walking a tightrope, and refused to discuss the possible future of rates,
leaving rate decisions to the market.
Treasury Secretary Scott Bessent thought he could do better by
trading government debt. He apparently
thought he could do the Fed’s job and cut rates. His policy worked for a few hours, then it
flopped, and interest rates went back up.
He could not control enough Treasury securities to sustain his policy in
a trillion-dollar world.
Bessent and Warsh had worked under star investor Stanley
Druckenmiller, who roundly rejected Bessent’s move. Britain’s Financial Times headlined, “Bessent gets
Drucked.” Druckenmiller opposed the Treasury
trying to take over the Fed’s job of setting monetary policy. And market leaders said they wanted to know Fed
thinking and disliked Warsh’s reticence.
Warsh got the message. He admitted that persistent inflation could
lead the Fed to increase interest rates.
As a responsible central banker, he eased market worries by recognizing reality. Trump would not get the lower rates he demands,
largely because the Iran war is pushing prices up.
Interest rates are soaring. Competing borrowing demands by the AI sector force
governments to pay higher rates to sell their debt. Fighting the Iran war’s inflation requires
central banks to raise rates to reduce borrowing and slow the economy. Long-term interest rates are hitting highs,
contrary to Trump’s intent.
He continues to wage war on the Fed, aiming to gain a majority
of rate-setters beholden to him. Winning
has become an end in itself, detached from market reality.
The president still wants to harass Fed Governor Lisa Cook, a
Black woman, off the Fed Board. A Trump lackey argues that she cheated on two
mortgage applications. She proved that a
clerical error was fixed and did not result in her receiving duplicate homeowner
benefits. Secretary Bessent also claimed
two principal residences, but Trump has not sought his removal.
Cook has already spent about $1.3 million defending herself. Trump has similarly gone after Powell, who protects
himself from false charges by remaining on the Board.
This Fed foolishness is far less important than the huge and
growing federal debt. Annual debt
payments exceed all U.S. military spending, and they keep increasing. At some point, government outlays would have
to be cut and taxes increased just to cover debt payments. That’s not likely to be politically
acceptable.
Then, the only way to pay for government to reduce the
federal debt will be to make each dollar less valuable -- devaluation. The U.S. did it in 1933 and 1971 by ending the
dollar’s link to gold. With devaluation,
the dollar’s value would be cut relative to other currencies and gold. The fixed dollars of the federal debt could
be paid off with new dollars worth less.
Devaluation is not painless.
While exports may be stimulated by cheaper dollars, people may have to struggle
with inflation, as happened in the late 1970s.
And the devalued dollar could lose its place as the world’s reserve
currency, the money other countries want to hold, drastically undermining
American world power.
