Fear & Dominance

| October 06, 2023

I have great respect for The Economist. During the midterm elections they called the results with amazing accuracy. Of course, I love opinions that are backed up with statistics and lots of graphs. No, I never had a pocket protector, but I still have my slide rule.

So, I must take notice when they write “the trajectory of America’s public finances is so dire that the most bearish investors talk of the long-term risk of “fiscal dominance.” * Before I explain fiscal dominance, reflect on the chart below from the St. Louis Fed showing total government interest payments over the last ten years.


Government receipts do not match government expenses. The size of annual interest payments on the debt today is staggering when compared to all our experiences since the end of World War II. They dwarf the 1960s, when we simultaneously funded the Vietnam War, the Great Society, and Medicare. Herein lies the fear. Fiscal dominance means that high deficits and high interest rates incentivize the Fed to create artificially low interest rates. If the Fed were to push down rates, it would prioritize lowering its debt service costs over controlling inflation. The Three Stooges pie fight in Congress makes things worse.

I shall discuss this subject in greater detail in next week’s newsletter. I expect that today’s fear will create opportunities for our fixed-income investors.

*A surge in global bond yields threatens trouble. Publication: The Economist. Publisher: The Economist Group Limited. Date: Oct 4, 2023. © The Economist Group Limited, London 2023.  https://www.economist.com/finance-and-economics/2023/10/04/a-surge-in-global-bond-yields-threatens-trouble. Accessed 10.05.2023.

** U.S. Bureau of Economic Analysis, Federal government current expenditures: Interest payments [A091RC1Q027SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/A091RC1Q027SBEA, October 5, 2023.