Transcript:
Easan Arulanantham:
Greg sent in this question that we broke into three different parts. So the first part is regarding the US debt, it appears the consumers have a relatively low debt level at the moment while government debt is high. Will this not cause a problem? If they keep raising interest rates? Will it not increase the cost of borrowing and eventually stifle investment, especially with such a tight labor market and baby boomers aged out of the workforce? What would what would the effect of higher costs of government borrowing at the same time have lower tax receipts if they did manage to look cool demand?
Tom Vaughan:
Yeah. So it’s an interesting question. Basically, what we’re saying is what happens when you raise rates? Yeah, so one thing that does happen is that the government debt gets more expensive, you know, when they’re pushing out two year treasuries at a really low rate. Now, the two year treasuries more expensive, right? I mean, as pretty simple. And so interest cost goes up for the government, of course, corporations, right, kind of three categories, government, companies, and people write consumers. And so when you look at the kind of the companies, you know, their cost of borrowing goes up, you know, and they’ll do less investment in that environment, just because it’s more expensive for them to borrow if that, if that’s how they’re funding their, their business, which a lot of companies are, and, of course, consumers cost of borrowing and credit cards, mortgages are two big ones, auto loans, you know, less likely to buy homes at 6% than 3% Still gonna buy them and a lot of cases, but less, right, less likely to buy autos at a higher rate for the auto loan, if you happen to need an auto loan. You know, that’s what slows down investment and total. Now, the government also essentially invests their spending is is part of the stimulus, right? So in case, some of its very direct, like the infrastructure bill, right, they’re going to spend money on infrastructure, they hire people, money is going to flow into the economy, and or the stimulus bills that they did that sort of an investment into the economy to kind of push things back up, you’re gonna have a lot more difficulty doing that, when you’re paying out a lot more of your totality, your total budget for interest, right, so the more the interest rates comes up, the harder that’s going to be, I think the other problem right now for the government, specifically, is that we’re in this high inflationary environment.
And part of that is, like you said, from the Labor tight, pool pool, whatnot, but we’ve got this high inflation environment, we’re not going to see a lot of stimulus coming out, it just doesn’t make sense, they’re going to shoot themselves in the foot. To do that, and such, my effect, that’s one of the things that really interesting, so here in California, they’re doing this, they’re gonna send people money as a rebate on the gas tax. And, you know, which sounds good except for the fact that that’s actually one of the problems, they keep sending out money and it creates an inflationary environment. You know, we’re all gonna be happy to get it. But it’s, it’s actually an inflationary stimulus and in a highly inflationary environment. So it’s, you know, it’s political, probably get some votes, people be happy to see the check. But maybe they won’t be so happy if that means that their food prices continue up or whatever. So it’s very, there’s a lot of interrelationships here that are quite fascinating to look at. But, but that’s how I would look at this question. rates going up slow things down. That’s exactly what they’re trying to do. Do they slow things down so much that we end up in recession? Do we end up with a 40% downturn instead of a 20%? downturn? You know, those are the questions that I’m asking all the time. But right thought process in the question that, you know, this is going to cost the government something also, which is kind of fascinating, because basically have the government raising interest rates on themselves, as well. So you wonder if there’s some thought process there or not, but inflation got so high, it’s what they need to do now. So good. So there’s a second portion of this question. Yeah.
Easan Arulanantham:
Yeah. But you also have to think that as long as there’s faith in the US government pay their debt obligations, they’re allowed to they can raise their interest rates, as long as people are willing to still buy those treasuries. And there’s no, there’s no lack of demand. That’s where the US government has that kind of edge is they’re considered a safe currency, a safe haven currency. And so people in times of recession tend to flood into US Treasuries. And so that’s a safe space for them.
Tom Vaughan:
Well, that’s a really good point because kind of feet divided up, the government can continue to spend even for higher interest rates or any of those types of things because they can print dollars essentially In an issue new Treasury debt, and you know, there’s a pretty willing and open market for that. And so even though the deficit might grow and what have you, and it costs more, as long as people are still willing to buy treasuries, and you know, the US is really fortunate in the fact that the dollar is kind of the main currency worldwide. And so that that’s an area that, you know, we still get money coming in. And so because of for as long as I’ve been in this business, people have been talking about the deficit being too high. And it’s going to be this massive, you know, problem from that. I still think that’s definitely a possibility, but it hasn’t happened yet. And the reason is, is because the US is still seen as a safe haven. Money still comes in, and when things fall apart, and we have a big recession worldwide, like we did in 2008. You’ll still see treasuries going up because people are buying treasuries. And that’s what funds that deficit, which just grew because you know, the the receipts fell, right. So very interesting.