Opposition Is True Friendship

The Credit Strategist - May 2025

Lower interest rates are not going to solve America’s debt problem – they will only make it worse. Debt is the problem – far too much of it to ever be repaid other than through default, currency devaluation or inflation. There is far too much debt for lower interest rates to meaningfully reduce our debt burden; debt is increasing too quickly for lower rates to cut servicing costs. This is a matter of math, not opinion, and math doesn’t lie. Lower interest rates – if markets were even willing to accept lower compensation to finance the government – also create higher inflation, more speculative (i.e. unproductive) lending and investing, and enable more government spending. Only extremely high rates of economic growth possibly offer a way out of this problem but such growth rates are unattainable with so much debt weighing down the economy (not to mention the heavy regulatory burdens that will remain even after President Trump takes a hatchet to them).

The compulsion to lower interest rates is a natural response to economic stress but like many such responses is precisely the wrong response to the underlying problem. Reducing interest rates will move them below the rate of inflation where they sat for virtually all of the period since the Great Financial Crisis (GFC). The GFC was a debt deflationary bust where a great deal of debt was destroyed due to the inability of borrowers to repay it. Once the GFC ended, interest rates were kept below the rate of inflation by central banks for years. This led to extremely high rates of inflation in financial assets during the 2010-2020 period (totally ignored by the Fed and other central banks) that culminated in the consumer price explosion during the pandemic that left prices at permanently higher levels[2]. The official rate of inflation fell over the past two years but this glosses over the fact that prices remain elevated and ignores the fact that the way we calculate inflation today is basically nonsense. If we measured inflation today the way we did forty years ago, it would show double-digit increases. The fact that economists ignore the differences is how we calculate inflation today is a stain on the profession.

While the Trump Administration wants to bring inflation down further, it is going to be very difficult to do so because its tariff policy is going to increase prices and Congress is resisting spending cuts. Plus DOGE is discovering that cutting government spending is much harder than it looks since every government program is supported by political constituencies that will fight to the death to preserve them regardless of their utility. Further – and this is another factor largely beyond the control of the President or any president – inflation won’t decline because the value of the dollar in which prices are denominated will continue to decline in our fiat money system (potentially exacerbated by other factors such as de-dollarization). A weak dollar policy will only exacerbate that phenomenon, placing further upward pressure on prices. This means that both consumer prices and financial asset prices (stocks, bonds, collectibles, real estate) will remain under upward pressure (with some exceptions like lower prices in some real estate markets) until the economy experiences a future debt deflationary bust similar to the GFC which is certain to happen sooner or later.

I realize this isn’t a particularly uplifting or popular way of looking at the economy and financial markets but my job is to present the world as it is, not as I would like it to be. Right now perhaps our greatest concern should be a “failure of imagination,” a phrase Thomas Friedman famously used to describe our failure to prevent the 9-11 attacks. People fail to imagine – or accept the possibility – that we could experience another debt crisis like the GFC. Considering that crisis happened less than twenty years ago, that is a stunning failure. Not only is another crisis possible, it is likely because that debt crisis was “solved” through the creation of tens of trillions of dollars of more debt that can’t possibly be repaid in constant dollars. That leads to the ineluctable conclusion that the world will face defaults and a combination of fiat currency devaluation and inflation to handle that debt. There is no other option because the quantum of debt is far too high for growth to resolve.

Perhaps it’s simply human nature that leads people to leave the problem for future generations but if that’s the explanation for inaction then it reflects badly on our species’ ethical core and survival instincts (no wonder Elon Musk wants to settle other planets). But for those of us who intend to stay on earth for the rest of our lives, the debt problem is absolutely existential – not tomorrow or next month or next year but today because it is already eroding the value of our assets and the quality of our society. Wealth inequality, political divisiveness, incivility, racism and war are all consequences of the debauchment of money which has broad cultural significance. As George Simmel wrote in The Philosophy of Money (1900):

“The broad cultural ramifications of the nature and significance of money are to be seen in the movements that lead money towards its pure concept and away from its attachment to particular substances. Thus, money is involved in the general development in every domain of life and in every sense strives to dissolve substance into free-floating processes. On the one hand, money forms part of this comprehensive development; on the other, it has a special relationship with concrete values, as that which symbolizes them. Furthermore, money is influenced by the broad cultural trends, and it is as the same time an independent cause of those trends.”[3]

Money isn’t just money and debt isn’t just debt. Currency depreciation is inherent in all fiat currencies; it is a basic mechanism whereby countries repay their debts. Debt has particular societal resonance because it creates a trust-based relationship based on an exchange of promises. If those promises are broken, it damages the bonds of trust on which an economy and a society rely. In an economy as heavily reliant on debt as ours, unpaid debts wreak serious damage. During the GFC, we saw how markets froze when counterparties stopped transacting after unrelated parties stopped meeting their obligations. This required unprecedented government intervention that reinforced rather than reformed the imprudent policies that created the original debt crisis. It also lowered the long term value of the dollar and other fiat paper regardless of its transitory trading value, also weakening long term global financial stability by leaving the world with more debt than it can service or repay. Currency depreciation can be accelerated or slowed depending on government policy which is why managing our currency in a manner that is certain to accelerate its depreciation is not only reckless but immoral.