How Long Does It Take to Boil an Economy?

We all know the old saw about slowly boiling a frog.  It is a cruel idea but demonstrates how the consequences of steady, yet destructive behaviors can sneak up on us if we aren’t careful.  America has been growing its levels of debt for years.  Some have worried about the outcome while others are more sanguine.  For now, those remaining calm have been on the right side of history.  Could that be changing?

As of right now, the answer to the above question is unknown.  But there have been some signposts lately which could be suggesting that the water is noticeably warmer.  When the frog is in lukewarm water, it might feel comfortable.  When interest rates were rock-bottom low coming out of the Great Financial Crisis (GFC), the economy felt relatively comfortable.  Lending was ample and prices encouraged borrowing because interest didn’t take a large portion various budgets.  But the flame might be being turned up.

Some important benchmark rates have hit higher levels than was normal during most of the post-GFC period.  Recently, 10-year Treasury yields reached their highest level since 2007, touching 4.35 percent according to this article from CNBC.  Adding further fuel, the New York Times reports here that mortgage rates pushed past seven percent for the first time in over two decades.

Surely the Fed can save the frog economy, right?  That’s the rub, they are trying to slow down the economy by reducing the money supply while leaders in the nation’s capital keep stimulating it with debt issuance.  It’s like Jerome Powell is putting cool water into a vat sitting on top of a flame

Next month may actually be interesting in the beltway and that has nothing to do with the 2024 elections.  Instead, there is a big list of budget-related items set to expire at the end of this month when the nation’s fiscal year ends.  For instance, discretionary spending for fiscal years 2024 and 2025 are subject to statutory caps.  The farm bill will expire which offers things like crop insurance; Supplemental Nutritional Assistance Program (SNAP) will also end.  A full list of expirations can be found here. 

Spending by the government requires debt issuance since the nation does not have a savings surplus.  Instead, it requires the kindness of strangers to lend it money.  America has been gradually expanding its debt level.  So far, the economy can still croak, and it is unclear how high the debt needs to get before things boil over.  We could get a look soon though because next year is an election year, so politicians looking to be rehired by their constituents are sure to find room in the budget for a bit of pork.  What is less certain is whether lenders will be as willing to fund their agendas and at what price.