Reporting for Bloomberg, Lisa Lee wrote Saturday that the US Treasury’s massive borrowing had left Federal Reserve Chair Jerome Powell with no room leftover to fight rising inflation in the United States economy.
It’s not just the US government that went on an unprecedented borrowing spree.
Corporate leverage out the wazoo in the frenzy of ultra-cheap loans (subsidized by your higher expenses this year and next) could leave the economy teetering as the central bank tries to raise rates and get a smooth landing out of this oh so scientifically turbulent ride since 2020.
Lee reported: “Corporate debt has surged $1.3 trillion since the start of 2020 as borrowers took advantage of emergency Fed action as the pandemic spread, slashing interest rates and backstopping financial markets to keep credit flowing.”
Why is this a problem? Because “more debt held by more companies suggests potential risks as borrowing costs rise from currently low levels.”
Suppose the Fed raises interest rates, but the economy hasn’t stabilized into a productive cycle with strong financial sheets, abundant supply, and consumer confidence. In that case, the US economy could become like an alcoholic who quits “cold turkey” too abruptly and has a seizure.
The one neat thing about economic shocks like this is that they incentivize businesses, households, organizations, and individuals to make trade-offs and cut unnecessary expenses while boosting revenue.
As an investing legend, Warren Buffett, the Oracle of Omaha, once said: Only when the tide goes out do you discover who has been swimming naked.
These calculations, made automatically by economic actors, reallocate capital to more productive uses in the changing economic environment and economic vicissitudes. The rest of us become more efficient to pay for the government and financial system’s worse-than-usual inefficiency.
That’s not fair, and on the net, the economic profession would generally agree that it destroys capital and increases overall inefficiency, but whoever said that planet Earth isn’t a meat grinder or that the US isn’t on planet Earth?
It’s not the government that will whip inflation for us and save us. They’re the ones that existed of, by, and for monetary inflation since 1913 when the Federal Reserve was created. Only market alternatives will shelter and grow your savings.