alt Hacker NewsThe question is, are we going to have another Volcker willing to raise the prime rate to 20% to counteract our useless legislative branch? Or is the idea of an independent central bank dead at this point?
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I don’t think raising rates like “Tall Paul” (Volcker) did would help in this situation. We are in a bit of a pickle. Raising rates would cause the servicing costs to become enormous and would likely just result in even more debt. The alternative, lowering rates, would likely cause a massive spike in inflation. Inflation makes the debt easier to manage because it’s worth less, but then that wreaks havoc on everyone (especially folks on fixed income).
I think the only way out is to reduce military spending, nationalize the health care system, and tax the hell outta the ultra wealthy. But I suspect that won’t happen at least based on the current oligarchy running the country.
It’s really unfortunate too, because we could be taking on debt to invest in citizens like making college free, improving teacher salaries, and general infrastructure but… we ain’t.
Doing that in the middle of the AI bubble would be a huge systemic risk to the US and world economy. Expansion of the US economy is now largely driven by the colossal amount of data centers being built. No one anywhere in the world would invest in risky data centers, LLM company IPOs etc if they could get a 30y 20% bond. Financial institutions like investment banks, hedge funds rely on the AI musical chairs to justify the trillions of commitments on their balance sheets. A Volcker style rate hike would trigger a dash for the exit and cause the collapse of some of these institutions, risking a domino effect rippling through the entire economy.
Plus it'd also massively increase USG deficits since all the debt that's added and rolled over would be financed at that elevated rate. At that point, cuts would amplify the above domino effect (cf. Kalecki Levy equation) reducing tax intake, but no cuts would mean unleashing a debt spiral.