President’s Commentary

A great deal of attention has been on the bond market globally and the rise in long-term interest rates. Here is my take—this is a long overdue correction following 15+ years of suppressed interest rates that obscured the true cost of government (not just in the USA). By now it is clear that elected officials of both parties are incapable of imposing spending discipline. Thus, the bond market will do the heavy lifting.

Is this a financial catastrophe? I don’t believe that it is because we are still in the midst of a long overdue reset to market expectations on the cost of borrowing. There were benefits during this period of below historical levels of interest rates—ask anyone with a 2% mortgage. There were also significant costs. Those chickens are starting to come home to roost. In the United States we have passed the $40 trillion national debt threshold and are paying more in interest annually to service that debt than we are spending on defense.

The signal from the bond market is that governments need to go on a Fiscal GLP-1 regimen. The objective is NOT (at least for now) to balance the annual budget—let’s try something realistic like decreasing spending by 5% (that translates to about $350 billion). We will learn we can live with this after the screaming and hysterics die down. Bottom line—we can decide how to do it or the bond market will force us to do it.