Bad Money—Sire Of A Speculator’s Casino

Bad money is the sire of manifold economic ills—both on Wall Street and in Washington. On the latter score we have recently been cataloguing the fiscal calamity that has ensued since the 1980s owing to the fact the interest rates have been deeply and chronically falsified by the Fed.

For want of doubt, consider the 35-year path of the weighted average cost of  interest on the Federal debt after Alan Greenspan inaugurated the current era of Keynesian central banking in the late 1980s. The decline has been unrelenting and cumulates to more than 75%, meaning that even as the publicly held debt surged by 12X between 1988 and 2022  (from $2 trillion to $24 trillion) the annual interest expense rose by only 2.9X. Politicians were effectively being told that debt doesn’t matter.

Needless to say, the above chart, which tracks nominal interest rates on Uncle Sam’s debt, was not a consequence of the small reduction in the average inflation rate since 1988, either. In inflation-adjusted terms, the yield on the 10-year UST dropped from +4% to a level which is still -2%. That’s a 600 basis point decline in the real carry cost of the public debt—a signal to Washington to borrow with reckless abandon.

Alas, it did.

Inflation-Adjusted Interest Rate On The Federal Debt, 1988-2023

The same false financial signals were registered on Wall Street as well. Since 1988, the aggregate market cap of the Wilshire 5000 has increased from $2.7 trillion to $44.4 trillion or by 16.3X.