The Brutal Truth About Jerome Powell & Future Rate Cuts - David Friedberg

Freeberg, we have uh this idea that there would be a couple of rate cuts and maybe we get monetary velocity going again. People will be able to take more loans out, invest more in business. But with the stock market tearing it up, there's a lot of wealth being put into the system with the big beautiful bill. There's a lot of spending in there as we've talked about here. Putting that aside, it feels like the economy is in really great shape. Chances of a rate cut has now flipped. No change is now the favorite option for September. whereas a week ago the favorite option was 25 bips. So this idea that we're going to cut or the Fed's going to cut that seems to be changing as well. So

your thoughts on the um the macro picture here? So I'm not sure like the firing of Jerome Pal necessarily solves the US fiscal challenge which is rising interest rates on the long end of the Treasury curve. So, if you look at the the 30-year Treasury yield over time, and Nick, maybe you could pull this up while I'm talking, but as of today, we're at exactly 5% on the 30-year. And you can see that this 5% yield, which is what the market is demanding the United States government pay in order to be loaned the money to make the bill payments that the US government has to make every year is the highest it's been. The borrowing cost is the highest

it's been since going all the way back to 2007 as of today. And I think this is the real story for the United States. We have 36 trillion of debt. The average interest rate we're paying on that debt today is 3.3%. That's the average of all the treasuries that the federal government has issued, the Treasury Department has issued to borrow the money that it is using and has used to pay all its bills. And if you look at the 5% number, that's a 1.7% hike. At 3.3%, which is the current average rate we're paying across 36 trillion, we're we have a run rate interest expense. So just the money we're paying each year and the interest of the outstanding debt is $1.2 trillion a

year. And if this spikes up to 5% from 3.3, we're talking about nearly $2 trillion a year in interest expense. And that number is only going to get bigger as we borrow more money each year and the loan balance goes up, the outstanding debt goes up because we are still running a deficit. The government is spending more than it's making every year. So the crisis that America faces is a more profound fiscal crisis where the rates that we're having to pay are a function of what the market is telling us. The market does not want to loan the United States money over a 30-year period for less than 5% as of today. And so making adjustments to the short end of the Treasury curve, making overnight

loans cheaper, which is what the Fed can do, will stimulate the economy and make more money flow easily because now you'll be able to borrow money overnight to do stuff like build a building and then sell the building next week or next month or take out a car loan and pay it down and use your car to go drive for Uber and grow the economy and other things. So the theory is that if we can, you know, drive rates down on the short end of the curve, we'll grow the economy such that we'll be able to make those payments on the long end of the curve. Um, but there comes a point where again,

you're only going to be able to move the market so much until the more important fiscal situations are going to be addressed, which is spending, taxation, and some of the other key policy issues. So I think what the market is saying is it's not as much about Jerome Pal and frankly getting rid of a prudent individual may be more challenging than it is beneficial when the real challenges facing the United States need to be more hardily addressed. So I think that's my kind of take on this whole can I yeah go ahead Gavin build on it. So point number one the 30-year has gone

up since PAL started cutting rates. So that is just empirical proof that what David is saying I think is right. And second, the deficit has been a feature of American politics dating back to Ross Perau's, you know, 1992 presidential run, his independent third party run, his independent third party run. Here we go. But yes, but it the deficit never really mattered because interest rates kept going down such that even as our debt grew, interest expense has kind of a percentage of the government's budget stayed relatively low. Now that rates have gone up and don't seem like they're, you know, going down anytime soon, the

deficit does matter and it really matters. And you can kind of run a a couple of scenarios, but like pick your pick your metric. If the deficit kind of continues at current levels and we were to refinance the debt at the prices that uh you know David was talking about, you know, it's it's only a few years before spending on interest is significantly larger than spending on Medicare and Medicaid or Social Security or the military. So, pick something you care about. But you know our current course in speed it's it's in the not tooistant future where interest expense is the biggest line item for the government and that is not healthy and

that's why the deficit finally matters. It's just that rates are higher. But the great thing is is there is a virtuous cycle here. Has you close the deficit rates should theoretically come down and then those both feed on each other to kind of help the problem. And it is possible. There's no silver bullet here, but some combination of slowing government spending, extra revenue, and you know, tariffs are effectively, we've never had a consumption tax here in America, which I think is a good thing because consumption taxes are very regressive. But the reality is like even when Obama

controlled the House, the Senate, and was the most popular Democratic president of our lifetime, I don't think federal government tax receipts has a percentage of GDP got above 18 19%. So that's kind of the ceiling. And it for income taxes alone, and tariffs are really just a consumption tax that kind of insense domestic manufacturing. I mean, there's all sorts of reasons they're bad ideas. You know, David Ricardo, the theory of comparative advantage, 100% correct. Free trade is a good thing. But introducing some sort of a consumption tax, growing the economy a little bit faster through deregulation

and slowing government spending. I think there is a way out of this for America. Yeah. But it's important to find the way because the deficit finally does matter after really never mattering in my political lifetime.