Is US Government Dept holding back the FED from fighting inflation?
Interesting article here about the FED and how Government debt is an issue in stopping inflation.
Key Points
Almost 20% of all US Dollars were created in 2020!
This is from stimulus and various other government programs.
Inflation is not just a general rise in prices, but an increased supply of money, which in turn sets in motion a general increase in the prices of goods and services.
SO IS THERE ANY SURPRISE THAT INFLATION IS NOW AN ISSUE?
Prices are up, so people are flocking to CAPITAL GOODS to hedge against inflation.
Inflation is also self-propagating. If people think there will be inflation or increases in prices, they will buy more now, which increases those prices quicker.
Best Ways to Slow or Stop Inflation
NOT BUY THINGS
Believe that things are TRANSITORY
Through Fiscal policy of increasing Taxes to take money away from consumers
Through Monetary Policy of contracting the money supply
American Consumer Reaction
The American consumer is buying more stuff and driving up prices, and most do not believe that inflation is transitory. Therefore, it may be up to the government to make a difference.
Fiscal Policy
Does anyone see Congress raising taxes to take money out of the hands of consumers? Or the Government pulling back on their own spending? I DIDN'T THINK SO.
Monetary Policy
Does anyone see the FED contracting the money supply? They are discussing tapering (reducing bond purchases) and are committing to raising rates 3 times next year. Even the mention of this has slowed business a little.
Impact on Federal Debt
Now how does this impact the Federal Debt, which is approximately $28 Trillion?
If the FED keeps rates low, then the government can sell bonds at low rates, and the cost of holding that debt is controlled.
Understanding Debt Service
Imagine you have a variable rate loan on your car. If the rate stays at 1%, then it is cheap to pay the interest on your car, and maybe you would get a new car every year or two. Now imagine that rate goes to 5%. Would your decisions change? I think they would. You would keep your car longer and try to pay it off sooner.
Sadly, the Government does not act like a rational consumer. Debt service is 9% of the Federal Budget. If rates rise on US Bonds, then that percentage will increase.
Government Spending and Tax Collections
Logically, knowing that rates are rising, the government should be reducing spending. The only way to make up for this is to have higher tax collections.
Consumer and Corporate Debt
Additionally, due to the historically low interest rates we have had for the past several years, consumers and companies have increased the level of debt on their balance sheets. This is a problem if they need to refinance that debt at a higher rate, like the federal government will need to do.
Asset Prices and Debt
THINGS ARE GETTING MORE EXPENSIVE; MAYBE THIS IS A PRICE RESET TO HIGHER ASSET PRICES.
If asset prices go up and consumers and businesses have asset-backed debt, they may do better. But if the debts are taken out to pay rents or expenses, then we have some serious problems.
FED's Dilemma
The real issue here is that the FED needs to raise rates, but if they do, they crimp the government that they work for.
Will they keep rates low so the government can continually borrow at low rates? Or will we get some sense and reduce our spending as rates rise?
Impact on Multi-Family Investing in Worcester
Simply put, if rates remain low, then asset prices will rise as rents continue to rise.
And how realistic is it that the FED will raise rates to the level that it hurts the government's ability to continue to borrow?
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