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The Debt Is Not Going Away, It’s Getting Worse

Federal Open Market Committee (FOMC) participants gather at the Marriner S. Eccles Building in Washington, D.C., for a two-day meeting held on April 26-27, 2016

I was glad to hear the president of the United States mention our national debt in a tweet this week regarding the Federal Reserve Bank of the United States and interest rate policy. His point was that if the Fed were to lower short term rates, and restart quantitative easing (in banana republics they call this printing money), then our economy would explode even higher and the debt to GDP ratio would not look that bad.

That is a factual statement; with higher growth, and a consistent debt accumulation rate, the ratio would decrease.

But is that good for America?

I get where the president is coming from. With the last administration having added more debt than all of the former presidents combined, essentially doubling the amount we owe, his room to maneuver to achieve policy objectives is quite limited. Mr. Trump’s policy seems to be “let’s grow our way out of this” problem. This is the way businessmen look at most financial problems.

My gut tells me POTUS wants to juice the economy, ramp up tax revenue, fix our infrastructure, rebuild the military and take care of other priorities, including paying down the debt in the second term, putting America on a sustainable financial path. That would be quite a legacy for sure.

The president is also correct that right now inflation is not a problem. It is well below the Fed’s target rate. Therefore, it would seem logical that stimulating the economy might be an option that could be successful without generating too much interest rate and inflationary risk.

However, as a former bond trader, there is an old saying on Wall Street: “Interest rates are low until they’re not.” In other words, at some point the bond market could take back control of interest rate levels and force our debt service obligations much higher, if the market deems America does not have the will or the ability to pay back what it owes. A 1 percent rise in rates could mean hundreds of billions a year in debt service payments.  

Trump may be right; his policy might be worth the risk at the moment. However, it is a fine line to walk. The Federal Reserve needs to do its job if inflation rears its ugly head. 

However, we also have to get control of entitlements and put in place market-based policies for health care to drive down costs. That falls squarely on Congress, which won’t happen without an America First party in power (notice I didn’t say GOP).

This isn’t going to get any easier and I have full faith in POTUS that he knows what he is doing. He has been consistently right across the board in his policy prescriptions.  

Originally posted at The Washington Times

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