The current level of national debt in the U.S. cannot sustain a rise in the Fed Funds rate, said Adrian Day, chairman and CEO of Adrian Day Asset Management.
Speaking to Michelle Makori, editor-in-chief of Kitco News on the sidelines of the Freedom Fest 2021 conference, Day said that while the Federal Reserve is “reluctant” to raise rates, it is still ultimately an inevitability, and when that happens, there will be a “crisis.”
The main risk is that when interest rates rise at the short-end of the curve, interest expenses will rise proportionally and become unaffordable, Day noted.
The solution is to issue longer-term maturity Treasuries, he said.
“The U.S. government should be doing 100-year bonds right now. They should be doing even 500-year bonds, perpetuals, which Britain used to have, but they’re not. They’re refinancing at the short end. But even with that…just servicing the debt is about 16% [of the federal budget]. If rates went back to even halfway of their 25-year average, it would be 25% to 30% of the budget would be on debt service, which would be unsustainable. It would be a crisis,” he said.
Before raising rates, the Fed could signal tapering through various actions.
“I think they’ll say they’re going to start getting out of AAA bonds. I think one thing we might see is, as a suggestion that they’re going to [taper] in the future, is to reduce purchases of mortgage-backed securities, because with the housing market the way it is, what on Earth is the Fed juicing that market for? It doesn’t need juicing, quite the opposite,” he said.
For Day’s views on the gold price and investments to buy in an overheated market, watch the video above. Follow Michelle Makori on Twitter: @MichelleMakori (https://twitter.com/MichelleMakori).
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