Schedule a Free Consultation

facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
Inflation, National Debt & Interest Rates.  What Happens Next? Thumbnail

Inflation, National Debt & Interest Rates. What Happens Next?

“If something can’t go on forever, it must stop.”

-Herbert Stein


In February 2019 we asked, “Where is inflation?”, and discussed the many wrong forecasts over the prior decade touting its re-emergence.  We also discussed some of the reasons it had remained so tame over the prior two decades.  But heeding Milton Friedman’s dictum that “inflation is everywhere and always a monetary phenomenon” predicted that continued expansion of the money supply would eventually saturate the market and the excess would drive inflation up.  Well, the Fed has finally found that limit and proposals now before Congress threaten to speed us past it.  Recently, the Labor Department reported inflation over the prior 12 months of 6.8%, the highest in 39 years.

We have further discussed in the past the “need” for the Government to boost inflation in order to ease the massive debt burden it has incurred.  The $29 trillion national debt now exceeds GDP by 25%, only the second time in history that the debt-to-GDP ratio has been over 100%.   The other time was right at the end of World War II.  Over the succeeding 35 years, that figure was reduced to 40% by persistent inflation, especially during the late 1970s and early 80s.  We can never “grow” our way out of such vast debt and defaulting is simply not an option, so inflation is the only arrow left in the quiver.

The potential of inflation-driven higher bond yields is, however, the booby trap in this scenario.  The interest on the Federal debt is approaching $600 billion per annum, even at current historically low interest rates.  Even a modest rise in rates, combined with continued deficits, would push this over a trillion dollars very quickly (that’s $114 million in interest every hour!).  That said, the 10-year U.S. Treasury Bond yield actually fell a few basis points on last week’s announcement to 1.47%.

The current high-inflation, low-rates status quo seems unstable – how long will investors buy bonds with sub-2% yields in a 6% inflationary environment?  As “Stein’s Law” predicts, it’s got to stop.  So, what will give?  Will the recent inflation prove to be transitory and resolve the conflict with rates, but thus exacerbate the debt problem, or will rates rise, exacerbating the debt-service problem?  We don’t make predictions here (“Bohr’s Law”), but it seems the market could force rates up with less resistance than Congress getting spending under control and slowing monetary growth.  We’ll see.

Click here to schedule a call with a BWC advisor today.


 The information presented in this article is obtained from or based on sources believed to be reliable. BWC does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this article. The article does not purport to contain all the information that an interested party may desire and, in fact, provides only a limited view. Information presented does not constitute an offer to sell or a solicitation of an offer to buy any security.

 All investments involve risk, including loss of principal invested. Past Performance does not guarantee future performance. Individual client accounts and performance vary. BWC does not provide tax advice.

 About Beirne Wealth Consulting Services, LLC – www.beirnewealth.com

Beirne Wealth Consulting Services, LLC (“BWC”) is a privately owned, SEC Registered Investment Advisor* with offices in Connecticut and Pennsylvania. BWC provides independent, fee-based investment management services and customized financial planning solutions. Our institutional business provides consulting expertise to defined benefit and defined contribution plans, endowments, foundations and non-profit organizations. Our private clients include high net-worth individuals and prominent families, many of whom bring complex wealth management challenges and multigenerational planning needs. For more information, please visit www.beirnewealth.com or give us a call today at 888-231-6372.

 *Registration does not imply a level of skill or training.

 © 2021 Beirne Wealth Consulting Services, LLC (BWC). All rights reserved. Reproduction or Use without permission is prohibited.