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Here's What's Being Bailed Out Next

Ariel Santos-Alborna profile picture
Ariel Santos-Alborna


  • Normalizing interest rates to the 5% level will slash corporate profits by 1/3 and lead to an insolvent corporate bond market.
  • Capping rates through yield curve control will ensure that pension systems do not meet their 7.5% return requirement.
  • I believe yield curve control and a pension bailout are more likely.
  • The only guarantee from this untenable situation is that the purchasing power of the dollar will fall relative to scarce assets.

In a free market economy, interest rates are determined by the interaction between borrowers and savers. Too much savings decreases the interest rate to incentivize borrowing and vice versa. For decades, Central Banks have slashed the Federal Funds rate to counter the negative impacts of the business cycle and maintain high employment. Keeping the borrowing cost well below its free market rate for forty years has created a gaping structural inefficiency. We have so much consumer, corporate, and sovereign debt that we cannot allow rates to rise in any meaningful way without creating a wave of defaults.

Nothing demonstrates this dynamic more than the chart below - the Federal Funds rate since 1980. For nearly the past half century, we have solved economic weakness through lower rates that allows indebted companies to refinance and double down on debt to create growth. Remember that too much debt was the problem in the first place. With more debt following each recession, rates can never reach their previous cycle high, hence the forty-year march to zero in the Fed Funds rate.

Fed Funds Rate(Source: FRED)

Investors oftentimes forget that repo markets nearly imploded once rates reached 2.4% in 2019. This led the Federal Reserve to a $500 billion bailout program and the infamous "Powell pivot." Investors also forget that before the coronavirus, we had record levels of corporate debt with over 50% rated BBB, or one level above junk. Once the recession occurred in March 2020, the Fed expanded its mandate to purchase corporate bonds down to the junk level. As the corporate debt chart below shows, we continued with the same playbook of lower rates and more debt.

corporate debt(Source: FRED)

Between a Rock and a Hard Place

The Fed cannot normalize without breaking something. In a recent Real Vision Interview, Chris Cole of Artemis Capital Management

This article was written by

Ariel Santos-Alborna profile picture
Ariel writes about global macro, bitcoin, and tech. Featured in Forbes and Finnotes.org.

Analyst’s Disclosure: I am/we are long BTC-USD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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