Fed Activity

The Federal Reserve Bank cut the funds rate by another quarter point last week, and at the same time, it is buying about $350 billion in Treasuries. This should be causing interest yields on long term T-bills to drop.

But it isn’t.

This is, in my opinion, an ominous sign. When the Fed buys treasuries and cuts rates, it is putting more dollars into circulation, which should have the effect of having more dollars chase a (slightly) smaller number of Treasuries. This increases demand for treasuries while reducing supply, which should drive down rates, but it isn’t. This seems counterintuitive.

The Fed controls short-term rates.
Markets control long-term rates.
It appears that right now, markets don’t believe inflation, deficits, or Treasury supply are under control.

For years after 2008, the term premium was near zero or negative because:

• Inflation was dormant
• Deficits felt manageable
• Global demand for “safe assets” was enormous
• Central banks suppressed volatility

That era is over.

Now investors demand compensation for:

• Persistent inflation risk
• Fiscal dominance (monetary policy subordinated to debt financing)
• Political dysfunction
• Rising debt-to-GDP
• Uncertain future Fed independence

This term premium alone is adding 100–150+ basis points to long yields, kind of like people with poor credit paying higher interest rates.

In a normal cycle:

Fed cuts monetary supply→ growth slows → inflation falls → long rates drop

Today:

Fed cuts monetary supply→ deficits widen → Treasury issuance rises → inflation risk persists → long rates stay high

This is called a supply-driven yield curve.

In this case, investors are looking 10, 20, and 30 years into the future, and the risks of holding IOUs from the Federal government are no longer near zero. They are somewhat higher, and therefore the risk of a potential deadbeat Federal government not being able to repay you, or repaying you in inflated, less valuable dollars is higher, and investors want to be compensated for this increased risk.

Markets see:

• Structural labor shortages
• Re-shoring and inflationary monetary policies
• Aging demographics
• Entitlement growth with no funding (Social Security)
• Defense and geopolitical spending locked in

So the belief is that the Fed may cut rates now, but inflation or fiscal pressures will force higher rates later on down the road. This is becoming more and more possible the longer you peer into the future. That expectation keeps long rates high.

As more and more people come to realize that the national monetary issues are going to be a problem, the more that they will be apprehensive about the future. Perception is what drives faith in the dollar, and once we reach a critical tipping point, the dollar WILL collapse.

Spending = Taxes + Borrowing + Inflation (monetization)

For spending to constantly increase, as it has been doing, then the other three must increase. Since we know that spending CAN’T decrease because any politician that proposes meaningful cuts can measure his career with a cesium clock, the three supplies of cash (taxes, borrowing, and inflation) must continue to rise. The probability of a crash caused by a loss of financial credibility is low, but rising (10–20% over the next 20 years).

There are only two sustainable endgames:

A. Explicit choices

• Raise taxes
• Reform entitlements (drastic cuts to Social Security and Medicare)
• Reduce spending growth
• Painful, honest, stabilizing.

This isn’t likely to happen in today’s environment- the younger generation is screaming for MORE spending, not less. You think the dollar is taking a beating now? Wait until the government passes Medicare for all. Democrats spending more when they win in 2026 (which is looking more and more likely) and again in 2028 (also looking more and more likely) will result in vastly increased government spending.

B. Implicit choices

• Debase and inflate the currency so you can pay yesterday’s debt with today’s less valuable dollar
• Suppress rates by pressuring the Fed and QE
• Let purchasing power erode

Politically easier. Economically stealthy. Socially corrosive, kicking the can down the road.

History suggests governments choose B until forced into A.

Bottom line

The future is not collapse, but it is painful. At least for the next decade. (The US economy is large and has a lot of inertia). Absent reform, the U.S. likely faces:

• Higher average inflation
• Lower real returns
• More volatility
• Less policy credibility
• A gradual transfer from savers to debtors

The danger is not that everything breaks tomorrow. The danger is that everything slowly works worse, and by the time the costs are obvious, the choices are far harsher. The last item, above, means that you need to hold things that aren’t denominated in dollars. The goal is not to “beat the system,” but to avoid being silently taxed by it. Historically, people who do best focus on resilience, diversification, and optionality, not prediction.

Assets that tend to be hurt most in inflationary markets:

• Long-duration bonds
• Large cash balances
• Fixed pensions not inflation-indexed
• Assets dependent on stable real rates

Cash is liquidity insurance, not wealth storage.

• Hold 3-6 months of expenses in cash or T-bills
• Use short-duration instruments (T-bills, money markets)
• Avoid long-term fixed-rate instruments unless yields are clearly compensating you.
• High T-bill rates right now are actually helpful because they reduce cash drag temporarily. Just don’t take bills that are long term. In the longer term, you will be beaten by inflation.

Gold and other PMs are non productive assets. Because of this they historically:

• Protect against monetary disorder
• Do not reliably produce real growth
• Best used as insurance, not an engine. Don’t hold more than 15% of your investments in PMs

Skills and income resilience beat portfolios

This is the part people underestimate. In every inflationary / fiscally stressed era, earners with scarce skills outperform savers and investors. If you can adjust income, negotiate pay, shift roles, or add consulting or side income, you are far more protected than someone relying solely on fixed returns.

The risk ahead isn’t sudden ruin for most people, it’s slow erosion of purchasing power and forced choices at bad times.

Individuals who:

• stay liquid but invested,
• avoid fixed claims,
• own pricing power,
• diversify quietly,
• and keep their earning ability strong

tend to come through these periods intact and often ahead of those who tried to time the crisis.

Build skills, build wealth, build a stable base.