Replies

RE: Under Carter mortgage rates topping 18%!

In the 95th Congress (1977-1979), the Democrats had a 292-143 majority in the House and a 61-38 majority in the Senate.

In the 96th Congress (1979-1981), the Democrats maintained control with a 277-158 House majority and a 58-41 Senate majority.

The opposition could not control Federal government spending then.

Today, we still have one branch of Congress under a VERY SLIM Republican control. If Biden wins by cheating in 2024, here’s what to expect based on what we saw the past few years:

In 2020 and 2021, the government borrowed a ton of money, and they had the Fed buy basically all the debt they issued. Printing money and spending it predictably led to runaway inflation.

If you’re in power and want to spend money without raising taxes, you’re bound to increase yields. And if you make your central bank print money to cover the deficits, you’re bound to cause a surge in inflation.

If Congressional control mainstains its status quo, then, the Federal government won’t slow down its spending ( it did not under McCarthy or even Johnson as speaker), and they (probably) won’t raise taxes, so yields are liable to hit new highs in 2024 to 2025.

Taken to its logical conclusion, that means the potential for 6% Treasury yields, 9% mortgage rates, and 8% car loan rates.

We don’t have to go back as far as Jimmy Carter though. During the 1990s, prevailing nominal 10-year interest yields were above 6% for most of the decade, most notably during the dot-com bubble when yields peaked near 7%.

But note, Then, government budget deficits were much lower than today (or nonexistent in some years), and inflation was lower.

Looking at real yields (10-year yields less inflation), we see that the typical inflation-adjusted yield in the 1990s averaged about 3%. This was during a time of SMALLER government deficits. During the dot-com bubble, real yields were closer to 3.5%.

So, Another plausible scenario of 3% inflation plus a 3% real yield would yield an identical result. Given the crazy levels that government deficits are currently at, I think these numbers are conservative if anything.

And I wouldn’t expect the Federal Reserve to be able to rescue this, either. The Fed could easily cut short-term interest rates and steepen the yield curve, but that’s no guarantee that 10-year yields would go down. If rate cuts cause the market to expect more inflation in the future, long-term yields could go up. If the Fed were to reverse its policy of shrinking the balance sheet, inflation would likely break out and surge again. The Fed is more or less stuck letting the market set yields after shattering the public’s trust during COVID. The Feds are in a quandary really.

The main culprit is GOVERNMENT SPENDING. No one has the will in Congress to cut it. NO ONE!