- The next bull market in stocks won’t happen until the Federal Reserve cuts interest rates to bail out the US government, according to Bank of America.
- BofA said that high rates will result in a staggering increase in interest payments on America’s $31 trillion debt.
- The bank said US government debt is expected to soar by more than $21 trillion over the next 10 years.
The next bull market in stocks won’t begin until the Federal Reserve cuts interest rates to bail out the US government, according to Bank of America.
The US government currently has a debt pile of $31 trillion, and that’s expected to soar by more than $20 trillion over the next 10 years. That’s $5.2 billion every single day, or $218 million every single hour, Bank of America’s Michael Hartnett said in a Friday note.
While the trillions of dollars of fiscal stimulus in the wake of the COVID-19 pandemic were successful in averting a recession over the past three years, that spending produced short-term gains that will eventually lead to long-term pain.
That’s because the US government’s rising debt pile and growing fiscal deficits will result in higher and higher interest payments as the Fed hikes rates, which influence the yields that must be paid on Treasury bonds.
For nearly two decades up until 2018, a combination of relatively small federal deficits and low interest rates meant that the US government was paying less than 1.5% of its GDP on payments tied to its debt. That figure has since jumped to 1.9%, and BofA hints that it will continue to rise.
“US Federal deficit up to 6.1% of GDP due to fiscal infrastructure spend; at peak of 2000 expansion, US ran fiscal surplus, peak of 2007 expansion deficit was 1% of GDP, peak of last expansion deficit was 2.5% of GDP,” Hartnett said.
This represents a clear deterioration in trends that is going to be exacerbated by the eventual surge in debt-servicing payments, and that’s where the Fed comes in.
Eventually, according to Hartnett, the Fed will be forced to resort to yield curve control, similar to the Bank of Japan, to “bail out the US government” and help lessen the burden of its surging interest payments.
Yield curve control is a form of monetary policy in which a central bank’s bond purchases target long-term maturities to control long-term rates. That contrasts with typical quantitative easing programs in which central banks seek to influence short-term rates.
“And that’s when the next great bull market in risk begins,” Hartnett said.
