Why the Price of Money is Rising: Trumponomics and Global Economic Forces

The Rising Price of Money

• 💡 The "price of money," or interest rate, is increasing globally, impacting everything from mortgages to business investment and currency strength.
• 📌 While central banks influence short-term rates, long-term interest rates are shaped by structural factors.
• ⚠️ This shift is particularly challenging for governments with significant debt, as seen in recent political instability in France.

Global Forces Driving Up Interest Rates

• 🌍 A major driver is the end of Pax Americana and increased defense spending by nations like European allies, Japan, and Korea, leading governments to borrow more.
• 📉 Historically, a "savings glut" from globalization and baby boomers saving for retirement kept borrowing costs low; this trend is reversing.
• 🚀 Globalization is slowing, making investment goods more expensive, while demographic shifts mean baby boomers are now drawing down savings.

Trump's Impact on Interest Rates

• 🇺🇸 Donald Trump's policies, such as tariffs, signal a reversal of globalization, which previously helped keep inflation and interest rates low.
• 💰 The "big, beautiful bill" (tax cuts) significantly increases the US fiscal deficit and national debt, requiring more borrowing and thus higher interest rates.
• 🏦 Attacks on Federal Reserve independence could erode its credibility as an inflation fighter, leading investors to demand a premium for lending to the US government.

The US Exception and Future Outlook

• 📈 While US borrowing costs have risen significantly since the pre-COVID era, they have seen a slight decrease this year, partly due to the US's status as the world's largest economy and issuer of the reserve currency.
• ⚖️ The US has more capacity to "play fast and loose with the rules" before facing severe consequences compared to emerging markets or even other advanced economies.
• 🏠 Factors like income inequality (higher earners save more) and the carbon transition (requiring massive investment) will continue to influence interest rates, with significant green investments potentially pushing borrowing costs up.

Implications of Higher Borrowing Costs

• 💰 A world of higher interest rates can be beneficial for savers and can help companies meet pension obligations more easily.
• 💡 Technologies like Artificial Intelligence (AI) require significant investment, which can push interest rates up, but also promise faster growth and improved living standards.
• ⚠️ The risk lies in governments borrowing more to cover rising costs from aging populations and healthcare, leading to a "bad equilibrium" of higher taxes and interest rates.
• 📉 The era of structurally declining interest rates, which boosted asset markets and allowed governments to borrow cheaply, is reversing, meaning the bill for accumulated debt is arriving.