Catch-22: Rate Hikes May Fuel Even MORE Inflationary Deficit Spending

Stefan Gleason

Of course, higher borrowing costs will force consumers to scale back and businesses to trim payrolls. A contraction in debt-financed economic activity will in theory cause inflation to fall.

During recessions, the government tends to increase spending on “stimulus” programs even as revenues shrink.

Members of Congress, unlike heads of households or CEOs of corporations, don’t practice austerity when times are tough or borrowing costs go up. They keep spending and borrowing.

Up until recently, politicians had the luxury of being able to finance their fiscal profligacy at ultra-low rates. But now their deficit spending will carry a massive cost increase in terms of interest owed.

Within just five years, annual interest on the national debt will surpass what the United States spends on national defense. The Congressional Budget Office projects that over the next decade, the federal government will owe more than $10 trillion in interest as the principal itself (now nearly $32 trillion) continues to spiral upward.

Some members of Congress are putting their foot down on deficit spending – or at least making a show of it – and vowing not to raise the statutory debt ceiling without at least some budget concessions from the Biden administration.

Biden officials are refusing calls for spending cuts and eying possible work-arounds to bypass Congress completely.

Among the possibilities, originally floated by Obama administration operatives, would be to have the Treasury Department mint a platinum coin with an arbitrary $1 trillion face value, sell it to the Federal Reserve, and use the cash to pay the government’s bills.

He added, “A modern monetary theory-inspired spending spree would be disastrous for the American economy and the American way of life.”

Treasury Secretary Janet Yellen is reluctant to employ a scheme that would signal so bluntly to the world that the United States has embarked on a course of hyperinflation as a way of managing its debt burden.

If a Zimbabwe-style hyperinflation sets in, then platinum may someday be worth $1 trillion (or more) per ounce. While such a scenario cannot be ruled out, the years immediately ahead may be more akin to the late 1970s when rising interest rates and rising inflation gave rise to an epic precious metals bull market in both nominal and real terms.

Platinum – along with gold, silver, and other hard assets – are cheap today relative to the prices they could command in the future as the government accumulates more obligations by the trillions.