Marc Cuniberti With inflation still raging and savings levels dropping nationwide, more and more consumers are feeling the pinch on their daily budget.
It indeed may be an untenable situation for some.
The Federal Reserve has the task of addressing ever increasing prices and they have several monetary tools at their disposal to do so.
The most notable and easiest to understand is to raise interest rates. By doing so, they make credit more expensive, which has the effect of cooling both consumer and business demand. Less demand, according to economic theory, will have a tendency to ease inflation as suppliers will drop prices in order to continue to sell their goods and services.
Unfortunately, more expensive credit puts additional strain on those individuals who must use credit to meet their day to day expenses. Although using credit to survive is an additional cost to already cash strapped families, it is an absolute necessity for some, especially when it comes meeting an emergency expense such as a car breakdown or other unexpected calamity.
As more and more families find it harder to make ends meet, social safety nets are more widely used resulting in governmental budgets falling under more stress as well.
Although the Federal Reserve can just borrow and print up cash to meet federal expenses if need be, the states have no such luxury. They can ask the federal government for help, but with every dollar the FEDS create or borrow, their credit costs go up as well.
We often think there are no ramifications from an ever increasing federal budget, but there are. It’s just that those ramifications may not appear until much later and indeed, the government can stretch their credit a lot farther than any state or you and I can.
After all, the Feds control the almighty U.S. dollar, and it permeates almost every monetary nook and cranny on the globe. That means there is lots of demand for the greenback and that need can sop up a lot of debt without causing immediate inflationary problems.
That said, the more dollars the U.S. borrows or creates for whatever reason eventually spells even more inflation and a vicious inflationary cycle can take hold.
One hard fact of rising interest rates is that higher rates make credit more expensive for debtors, and that includes any government that has debt, including the U.S. government.
Owing more than 33 trillion dollars in federal debt, when interest rates increase, the cost to service that debt reaches astronomical levels.
Like a cash strapped family that may depend on credit to fund part of their expenses, the U.S. government must borrow some of the money just to pay the interest on their debt. And like the cash strapped family, borrowing money to pay back previously borrowed money leads to even more debt.
Taking a step back and looking at the complete picture from a macro view, debt is permeating all walks of the global economy, both public and private.
With more and more money being borrowed and printed on a global scale, to somehow imagine that inflation will respond to rising interest rates and subside to tolerable levels may be skirting the outer limits of the twilight zone. In other words, there is an end game to all of this, we just don’t know what that might look like and when it will occur.
With both consumers, states, governments and businesses facing higher costs on all things which include paying higher borrowing costs on money already spent may mean at some point a critical threshold will eventually be reached. The math works out to no other outcome.
In the past, countries that have reached a critical debt threshold have had to restructure their finances which usually spelled a partial or total default to their creditors.
If that occurs on a global level or even just to the United States, because we are the biggest part of the global monetary system, what happens next is anyone’s guess.
“Watching the markets so you don’t have to”
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249 His insurance agency is BAP INC. insurance services. Email: [email protected]
