Will the Fed buckle?

I ask: How far will the Fed go with its rate hikes, and who are the new winners and losers? The best-case scenario, and the not-so-best case scenario. All in a little over 10 minutes.

“Everyone is worried where things are headed.” Read…  Fed’s Medicine “Gradually” Pricking the Commercial Real Estate Bubble?

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  68 comments for “THE WOLF STREET REPORT

  1. Maximus Minimus says:

    Hmh, it might be too much to ask the Donald when it comes to communicating somewhat intellectually complex subjects in a concise manner. His strength is in one-liners, but on different subjects, to a different audience.
    When it comes to precise tightening, this would be a mission impossible for anybody. It would help if the person-in-chief had great communicating skills, and established intellectual authority. It’s good if a person like Volcker offers support, but I am not sure about the rest.
    Last week was bad for the stock market, but zero interest rates have penetrated every nook and cranny. Imagine being a pyrotechnician trying to discharge a suitcase bomb, one wire cut badly…

  2. Sporkfed says:

    I’m guessing when 30 year mortgage rates are 6 percent for well qualified borrowers the Fed will at least pause the rate hikes.
    30 YR rates at 6 percent will crush most residential development.

    • Tom Stone says:

      Sporkfed, 6% 30 year Mortgages will crush most residential developments that depend on current prices.
      Build a smaller house to a lower price point and you will be able to sell them at a profit if you did not overpay for the land.
      Going through a Chapter 11 BK at least once is traditional for developers.

      • Sporkfed says:

        That is going to take a whole different mindset for both builders and consumers.

        • c smith says:

          This is going to take DEFLATION, the sworn enemy of central banks everywhere. It can’t and won’t happen. Too many bankers and bureaucrats depend on it.

        • Paulo says:

          Long overdue, imho. Many people live lives of insane consumption and they don’t seem very happy paying for it all.

          I remember my Dad many times talking about the ‘money tree’ in the backyard. It looks like a younger generation heard those stories too, but didn’t know it was a cautionary warning/fable.

          Maybe with 6-7% mortgages there won’t be so many teardowns.

        • JZ says:

          C Smith, Imagine you are a central banker. And the game rule is this. If you cause deflation, people will say you have policy errors and they will beg you to do more. If you cause inflation or god forbid hyper inflation, the mass will shut you down and hang your ass near the town hall.
          Your move.

    • Lance Manly says:

      The Fed’s grip over long term rates is much less than short term. Indeed if the Fed becomes too dovish that can result in higher rates as bond holders don’t see the Fed fighting inflation. To influence the long end directly they need stronger weapons such as QE and Operation Twist

      • Trinacria says:

        Dear Paulo: I think that our dear dads (and my wife’s dad as well) may have come from the same school….hard working immigrants horrified at the thought of debt. Thank God they instilled that into us….it is so nice and “light” to live a life without debt and not be addicted to insane consumption. Freedom from financial worries and freedom to make even better decisions as life presents them. Take care.

  3. Unamused says:

    With all due respect WR, if you suppose that p45 is pursuing an incorrect course, then you should probably consider that you have misinterpreted his goals and political calculations, as well as the methods which support the successful pursuit of those goals.

    • Wolf Richter says:

      Was I talking about P45’s course of action or goals? Nope.

    • Old dog says:

      What presidents credit themselves with and what they have actually accomplished is a million miles apart. The few presidents who have an impressive track record of accomplishments (e.g. Washington, Lincoln and a few others) were the most generous in sharing credit.

  4. WSKJ says:

    Trying to put thinking re interest rates in some kind of historical perspective, I have been collecting some data points. Here goes:

    I. from the Publishing ebook The Autobiography of Benjamin Franklin, p. 132 of 175 (as per my Kindle):

    Concerning a proposal that Franklin made to secure funding to protect the British colonies against attacks by the French and Indians alliance.

    In/about 1756, “an attack upon Crown Point” (Massachusetts Bay) was anticipated; funds were needed to secure defenses. Franklin proposed a way to secure this funding, despite some hurdles:

    The issuance of “orders”, i.e., bond-like instruments-
    “…I propos’d that the orders should be payable in a year, and to bear an interest of five per cent….they obtained instant credit….”, were eagerly bought up, and could “be used as money.”

    This story well worth reading in its entirety.

    Note: FIVE PER CENT INTEREST RATE (per annum)

    • Dale says:

      Benjamin Franklin’s autobiography is well worth reading in any case. IIRC, the chapter you are quoting (or close by) Franklin describes how he proposed a plan to the British that would have prevented the American Revolution.

      More to the point with regard to your comment, Franklin believed in fiat currency, as the gold was held chiefly by the British who used it in a somewhat extortionary manner. But Franklin also strongly believed in keeping debts manageable and paying them off, which would definitely make him an outsider to our present-day financial sector.

    • Petunia says:

      Five percent interest in colonial times was well above the normal 3% BOE rate. Franklin was selling them junk bonds with a 60%+ premium. The BOE rate was printed regularly in all newspapers of the day.

      • WSKJ says:

        Dale, your points are good. Franklin, in the autobiography, specifies where the money will come from to pay the “orders”, and he was accurate in his expectations. Yes, the British approach, of keeping the colonies on a tight leash, had the unintended consequence of requiring Franklin, and others like him, to come up with creative solutions to problems that could not wait on Atlantic crossings.

        I am rejecting the notion that Franklin was selling “junk bonds”. Bonds from the British government, to finance debt, date from 1694 (see Ellison and Scott, 2017), and by 1756. still had little resemblance to what we call “bonds” today. If British newspapers printed the interest rate offered on BoE paper that day, the British newspapers would have had to cross the Atlantic to give the interested “money’d” buyer talking points for his dinner with Franklin and associates. (And how many moneymen in the colonies sold BoE paper ? research, anyone ?) A different world.

        We think of junk bonds as investments that may not pay the promised interest, and may return less, or none, of the invested capital. Read the full account, and appreciate that Franklin’s intelligence extended beyond natural science to the world of finance.

        FIVE PERCENT was clearly an attractive rate at the time the paper was sold in 1756; that’s a datum for the memory bank.

        Cf. Louise Yamada (chart @ calculates 5.18 % to be the average U.S. interest rate (on the 10-yr) for more than 200 years (1798- 2016)

        • Petunia says:

          Two points:

          1798-2016 is not the colonial period. In the early days of the republic the biggest buyers of US debt were European bankers, so the rate expected would be well above the safe BOE rate of generally 3%.

          During the colonial period the BOE rate was known to every importer and exporter. British bonds were the normal collateral of every eastern seaboard bank. In the south it was different, mostly land and slaves.

  5. Andrew says:


    Im sure you have thought about this, but if not it would be beneficial for some readers that can’t listen for whatever reason- transcribe your podcasts.

    Also, what other econ / finance websites / blogs do you read? What else is cutting edge? The standard wsj, bloomberg, cnbc doesn’t ever dive in enough

    • jon says:

      Absoutely. I don’t have the time or patience to sit through a podcast.

      • backwardsevolution says:

        It’s a lot of work to take the spoken word and put it down on paper. I know, I’ve tried it with small segments of speech.

        Have at it, you guys! Let Wolf have a life!

    • Plumas One says:

      Transcribe podcasts ? I second the motion.

      • sunny129 says:

        Transcribe your podcasts, PLEASE. A lot easier to read, re-read if needed and for a faster comprehension, compared to audio or video. Thank you!

        • Wolf Richter says:

          One day a week, I have a podcast. The rest of the time, I have text.

          The podcast is about 2 to 3 times the length (in terms of number of words) as a normal article. It’s 10 minutes and 50 seconds long. If you read 2 or 3 articles, it’s going to take some time too. So just sit back and enjoy.

    • He HAS thought about it, because it’s mentioned everytime he releases one. ;) I like the diversity of content types, but I do agree that transcription is a good idea if feasible. Not only does transcription make content more accessibile to the deaf, it also == higher google rank.

  6. Alex says:

    Hit it out of the park! Loved the passion.

  7. raxadian says:

    Good report Wolf.

    Are you gonna do one about the FANGMAN companies next?

    Just think what world we will be left with if Netflix crashes next year due to losing Marvel.

  8. Setarcos says:

    Enjoyed the report – informative, no fluff.

    Trump was calling the equities market a huge bubble in 2016. So never understood why he took ownership (other than the favorable market reaction that really kicked up the day after the election). Think I get why he’s taking the position he is on higher rates though. Here goes …

    A couple friends/former colleagues interviewed with him (1 got a slot, 1 didn’t); heard the goal was to get the economy moving much much faster, i.e. grow the US out of the quagmire. Not a sure bet, though no easy paths forward were/are available. And the economy had been slowing for several successive quarters at the time…even with QE, ZIRP! Krugman (& others) had been saying 3% was absolutely impossible (sub2% at the time), even if we made him dictator.

    There is no disputing the economy turned very rapidly, though the higher rates has/will tamp growth down and that is in opposition to the growth strategy he consistently articulated.

    Not debating the merits of it, but this is what was said. Clearly there are risks regardless of what the FED does. Savers should be on his mind, but the focus is growth and benefits to savers probably being seen as a lesser factor.

    • Bobber says:

      Well, if the plan was to grow by taking on debt, the whole thing was a gimmick, as we already know.

      This whole “conservative” party thing about increasing debt to reduce debt is so moronic it’s insulting. This isn’t Wonderland and there is no such thing as pixie dust.

      I give Mr. Trump kudos for his trade policy, but the debt issue needs to be taken seriously. There’s no getting around the fact the U.S. has been living beyond its means and now must hunker down for a while. That’s the message that needs to be sent.

      • Setarcos says:

        A politician will need to sacrifice himself/herself politically to bring forward a message of fiscal discipline. That would be less difficult if no goals or aspirations of being re-elected and no allegiances to party politics.

        Bowles and Simpson put forward a reasonable plan in 2010 that had some bipartisan support. However, that plan and any other requires some guts, i.e. leadership, to move it forward. It died quickly without even an attempt at an obituary.

      • Gandalf says:

        The Republican Party has been dominated by anti-tax, anti-government Tea Party wingnuts for the last 10-15 years. Problem is Social Security, Medicare, and the military together make up 70-75% of the Federal budget. So really the only way to shrink the Federal budget that would make any difference would be to throw grandma to the wolves and/or unilaterally disarm and disband our military.

        There really will be no other way out of this increasing debt other than to raise taxes. If inflation gets to 1970s levels again, rates on Treasuries will also skyrocket, and the interest on paying off that debt, quite small right now, will rise to 1970s levels again, almost a fourth to one third of the Federal budget

        Cutting taxes does NOT increase Federal revenue enough from spurring economuc growth to offset the loss of revenue from the tax cut, ever, and even Laffer has admitted that to be true.

        So what the Trump tax cut for corporations did was pump more gasoline onto the fires stoking the Fed inspired asset bubble, basically by adding a second trillion dollar per year mortgage loan to House America. More debt for future generations of Americans. As we have seen most corporations did not use this extra money to expand and hire more workers, but to do stock buybacks to prop up or add to the asset inflation

        I have my theories as to why this tax cut was done, but that goes off into the realm of politics

  9. Yancey Ward says:

    I freely admit, the Fed has gotten further in the rate hikes and the balance sheet reduction than I thought was even possible 2 years ago.

    On market rates, though, I still don’t think the 10Y ever sees 4% in this cycle.

    • Lance Manly says:

      The quarterly refunding announcement by the Treasury on Wednesday should be a record. Which in an of itself is kind of amazing in comparing the current economic environment to that of the GFC. The question is how much supply can be pushed on to bond buyers before they push back.

  10. Huntly says:

    Thoroughly enjoying the podcast. Only complaint is that you need some kind of intro, as soon as I hit start it’s you speaking as if in the middle of a sentence. Keep up the good work.

    • Bobber says:

      I like the intro as it is. Some of the crime series on TV are done like that for dramatic flair. The financial world today is a crime series.

      • Wolf Richter says:

        Thanks! Getting this feedback is interesting and important to me. I thought about those two exact options, and decided to go one way, rather than the other way, but wasn’t sure how listeners would react. So it appears, there is no agreement :-]

    • Setarcos says:

      FWIW, really liked how it starts already moving and then a short pause for the intros/branding, then quickly resuming. Thought it was cool, though my grown kids might disagree.

  11. OutLookingIn says:

    Much data points to the probable cause of the next global crash.
    A currency crisis.
    The euro is now in a world hurt, despite the US trade deficit with the Eurozone, capital flows are driving the euro lower! Go figure?

    Banks and large hedge funds have access to euros which they may borrow at negative 0.3% they then sell for dollars and invest in 3 month Treasury bills for a yield of 2.3%. Utilizing fractional reserve practices, they then push up their annualized returns on their capital by 26% !

    The selling of euros for dollars is why the dollars trade weighted index is so strong, while the euro is pushed lower. Even through the trade weighting (basket) index is composed of 50% euros!
    This has been and will continue to be the source of FX stress.

    • Unamused says:

      ->This has been and will continue to be the source of FX stress.

      Something like that.

      When the Federal Reserve dropped Treasury bond yields to near-zero, they crushed the value of the U.S. dollar on global markets, encouraging non-U.S. companies to take loans denominated in cheap dollars. As their domestic currencies rose against the USD, it became progressively cheaper to service their dollar-denominated debt.

      But now that the Fed has raised interest rates, bond yields have soared, pushing the USD higher. Now the benefits of borrowing loans denominated in USD and paying the interest in other currencies have reversed: the strengthening USD has crushed emerging-market currencies, making it much more costly for companies to make their interest payments.

      Zombie corporations in emerging markets using weakened local currencies to service USD-denominated debt are doomed. Many of the USD-denominated loans were issued by European banks, which means they will suffer catastrophic losses as the emerging-market zombies default on their USD-denominated loans. Turkey comes to mind.

      All that free-flowing credit enabled the monumental expansion of production capacity in virtually everything: the world is awash in over-capacity. Producers have very little pricing power. Meanwhile, all the cheap debt that was spent on buying back shares boosted share prices but it didn’t generate any gains in productivity or any new products: it just enriched the owners of shares.

      The debt binge was mal-invested: it boosted capacity beyond global demand and squandered on share buybacks. Now the debt service must be paid, but thanks to near-zero pricing power, corporations aren’t making enough profit to even service debt.

      Central bank policies completely distorted production capacity and global supply chains, loading corporations with unserviceable debt and zero pricing power. As global demand declines – the inevitable result of bringing demand forward for a decade with cheap credit – indebted corporations won’t be able to service their debt.

      Mr. Market is betting that won’t happen, and that the Fed will have to back off: stock futures were way up, last I looked. But it will, regardless of what the Fed does next: US demand is about to take a major hit, as tariffs kick in, consumer prices go up, the promised cuts to SS and Medicare are enacted, and worker compensation is slashed. The results of this are perfectly predictable.

      No matter how bad things may be, they can always get worse, and they will. Chaos creates opportunity, and that opportunity is certain to be exploited. History may not be repeating itself, but it definitely rhyming.

      Alea iacta est.

  12. Genocidal Politician says:

    Brilliant speech

    .5% next

  13. Genocidal Politician says:

    The solid class of retirees that made their money before the era of political illness took full control were forgotten about
    Wolf reminds the world they are still there

    • walter map says:

      Retirees haven’t been forgotten. The Senate has them next up on the chopping block. Eddie Edwards says they need weaning. After the elections.

      Don’t you have a relative named Ecocidal? My pretty cousin Contour talks about him, but Mercator won’t say anything.

      It’s just a guess, but the Fed will probably buckle when the crowds start chanting to lock ’em up. That’s how all important decisions will be made starting next week. After those very low IQ individuals who are endangering the economy have been fired their rate hikes can be rolled back and everything will be better for everybody.

  14. Rob says:

    Trump himself is a floating rate loser… to the tune of over $180m

  15. Petunia says:

    Will the Fed buckle? Probably.

    The spread between the 10yr and the 30yr is too tight, tight for a very good reason. There is too much money in the lender markets and no money in the borrower markets. Since lenders borrow short and lend long, you can see the fed fighting against real market forces, there is no demand at higher long rates. To maintain an adequate spread their only wiggle room is on the short end.

    • I sometimes wonder if the Fed and its charter banks are on the same page. Easy money, but no demand. Excess reserves with interest, but phony collateral. The Fed is hostage to Treasuries monetization scheme, and the banks have to carry their water. I see the system as fully nationalized in principle. The Fed is a cabinet office, adhering to regulations laid down by congress. I wonder if they miss the free market much?

  16. Ishkabibble says:

    “Will the Fed buckle?”

    Does a bear s..t in the woods? But the bear is for the moment being constipated by the DNC and the Deep State, so the bear won’t be s……g until AFTER the mid-term election, with enough of a time interval after the election so that that the “independent” Fed’s sudden eruption of compassion for the common critter won’t smell so much to the bewildered herd that the herd will take political offense. As the Wicked Witch said after capturing Dorothy — “these things must be done d-e-l-i-c-a-t-e-l-y”.

  17. Msshell says:


    I thank you for taking your own time to do the podcasts. I enjoyed this clear, concise, informative one and I will send it to my financially challenged friends who listen to mainstream disinformation all the time.

    I especially thank you for not getting involved in political issues the way I have seen other websites do, becoming political and biased, while saying they are neutral and giving opinion as fact.

    • Ishkabibble says:

      The US literally has a war-based economy.

      “War” is the US’s way of life. Peace has become the greatest “threat” to the US economy.

      Unfortunately, perpetual war is political because an infinite number of printed-out-of-thin-air USD, “backed up” solely by US military power, will absolutely be required for the US to continue to conduct them.

      NOT being willing to discuss these facts is not only not sane, but, in the end, and I do mean THE END, very counter-productive. “Events” will override ignoring them. In short, sites that ignore them will themselves come to be ignored.

  18. safe as milk says:

    love the podcast. agree with everything except advice to trump. those savers are going to be in a world of hurt when their house values and 401k’s plummet. the president is “preparing the table” to blame the fed when the time comes. i doubt he will fire powell because he knows the rate hikes are necessary. he just wants some political cover. trump isn’t really a stock guy. his money has always been in real estate and he understands interest rates.

  19. van_down_by_river says:

    Excellent report. I still think Powell will change his mind and reverse course, but unfortunately all of my money was hard earned and I can’t afford to gamble it on my Fed bubble thesis.

    I got out in the late Summer after witnessing CNBC hosts all but foaming at the mouth with raging enthusiasm and had to watch as SPY continue to surge as high as 294. Now I’m starting to get a bit more enjoyment watching the game from the sidelines as a spectator (but I will admit to a GTC order of 130 on SPY).

  20. Plastic Money says:

    Ben Bernanke raised rates on an asset bubble did he not?
    What happened next?
    Because it was way to late.
    Saver’s return where suppressed and transfered toward large Banks that got even bigger.
    If you think that raising rates will solve this new and bigger bubble I am afraid with all due respect that you are mistaking.
    Lowering rates to 0% does not require a rocket scientist but once you have exhausted this artificial stimulus you can’t take them back up.

    With twice as much debt as in 2008 any small increase will acts like a Financial Richter Magnitude Scale.
    Asset price will start falling wile massive liabilities will remain the same but even much more expensive to service.

    As early as the 90’s in a real Market no sane person would have lent his or her money at such low rates wile risk were increasing all over. It would have prevented this mad asset inflation the FED created.
    They are in the final catch 22

    $1,000,000.00 at 10% = $100,000.00 interest
    $2,000,000.00 at 5% = $100,000.00
    $4,000,000.00 at 2.5%= $100,000.00
    $10,000,000.00 at 1% = $100,000.00
    OK now try raising back the rates
    “Bonne chance”

  21. rates go up – asset prices come down – consumer inflation goes up – fed raises rates – rinse and repeat

  22. Laughing Eagle says:

    I too enjoy the podcast once and a while. Keep doing them Wolf. Great analysis.

  23. Gandalf says:

    The history of the United States is that every 20 years since the very beginning if this country, there were cycles of boom times with increasing overspeculation and bad debt followed by financial meltdowns and recessions that became increasingly severe, until the Great Depression and WWII occurred.

    I think when future economic historians look back, they will see the 40 years after WWII as the abnormal era. This was a period of great geopolitical turmoil, but relative economic stabiliy and prosperity for the US.

    Recessions were mild, stock market growth was moderate, jobs were plentiful, US industry reigned supreme in the world.

    This was all due to a combination of the exceptional conditions that existed post WWII which were entirely the result of the Great Depression and WWII.

    The Glass Steagall Act was passed and Federal agencies like the SEC were unleashed to monitor financial shenanigans.

    Marginal income tax rates were around 90% for 20 years until 1964 when it was lowered to 70%. The massive Federal debt from the war was slowly paid off by 1975, when the total Federal deficit, as a percentage of GDP, reached its low point for the modern era

    Because the rest of the industrialized world had been destroyed or bankrupted by WWII, US industry reigned supreme for 30 years DESPITE the high tax rates and tight lending regulations (example, when my father looked to buy his first ever house in 1968, he was told that the rule of thumb was he could afford as much house as one year’s salary. Imagine if that rule were in effect today)

    The tight financial regulations and high tax rates had the effect of making the US economy a low gain and very stable system. Again going to my Electrical Engineering operational amplifier model, a low gain op amp will not oscillate as wildly as high gain op amps. Some don’t oscillate at all.

    Since then, we have seen Glass Steagall repealed, and Dodd-Frank does not do nearly enough to prevent unsound financial speculation. Federal financial regulations are again being increasingly weakened. Our once mighty industries have collapsed, or been sold off or offshored, as the rest of the world recovered from WWII and began to surpass us.

    Ten years after the last big financial meltdown, it seems we have learned nothing, and are headed for yet another debt bomb explosion, this one likely worse and more severe.

    Here, I disagree with Wolf’s hopeful predictions about another attempted Fed “soft landing”. Bubbles almost by definition always pop/explode, they are not physically constructed to let out air slowly, as they are held together only by the thin films of greed and hopeful speculation.

    We HAVE seen this movie before. Greenspan talked about irrational exuberance and soft landings, then backed off at the first signs of a downturn, only to allow the sub-prime mortgage bubble to build up to disastrous proportions.

    When the collapse came in 2008, it was sudden and rapid. And worse than the previous dot com bubble popping in 2000

    BUT, still not as bad as previous crashes. The SP 500 Shiller PE has not dropped below 15 since 1987, when the Fed first started its now standard policy of flooding the economy with money whenever the stock market takes a big and progressive drop. A Schiller PE of 15 used to mean a roaring bull market, in pre-Fed asset inflation days.

    And so I conclude with the following thoughts:

    1. We have returned to an economic model closer to the pre-Great Depression era “Gilded Age” economic system – few financial regulations and low taxes – both of which will result in a high gain op amp system that is inherently prone to wild oscillations from greed and speculation and bad debt

    2. What is different from the previous era is that the Fed is supercharging the asset bubbles and preventing a full deflation to historical norms (i.e. a SP 500 Shiller PE of around 5, which was typical for all previous major stock market bear markets) by jumping to the rescue every time and flooding the US economy with low rates and cheap money

    3. As a result, these cycles have shortened from the 20 year cycles prior to the Great Depression to about 10 years. With the Fed at the ready to bail out the economy, speculators forget the last disaster much more quickly, repeating the debt bomb asset inflation mistakes in just an average of ten years instead of 20 years

    4. The Fed can do this for as long as the US dollar is the world’s reserve currency, another legacy and fantastic benefit from the fact that we won WWII and every one of our economic competitors got destroyed. This will not be for much longer however. Trump’s America First trade wars against the nations that we depend on to keep taking the dollars that the Fed is cranking out so we can buy our durable goods cheaply is going to accelerate that move away from the US dollar. China, Europe, and Russia all have good reason to want to make that happen. When that happens, inflation will skyrocket. This may not happen now but very likely will happen in the next debt bomb bubble burst ten years from now

    5. Each downturn is likely to be increasingly severe, simply because our system has been made increasingly high gain- ever lower taxes and fewer financial regulations, ever higher Federal deficits, and ever more desperate Fed efforts to prop up the asset bubbles they have created. This cycle with increasingly bad downturns was the pattern in the 130 years of US history prior to the Great Depression, when the political willpower finally came about to reverse the course and basically turned the US economic system into a high tax, tight financial regulation low gain system

    • Gandalf says:

      Spelling correction: Dodd-Frank

      • Wolf Richter says:

        Autofix fixed it for you :-]

        But I thought your “Dodge Frank” was rather poetic and is now on my list of meaningful and hilarious typos.

    • Plastic Money says:

      Great post but take note that those 90% marginal tax rate apply to very few wealthy families.
      The 91% bracket of 1950 only applied to households with income over $200,000 that’s $2,000,000.00 in today’s dollars. We all know that wealthy people don’t make their money from salaries so it only applied to very few people. The majority of their income was not subject to that top bracket. There was also much more deduction them today and most would figure out ways to incorporate etc…. The existence of the 91 percent bracket did not lead to significantly higher revenue collections from the top 1 percent. One thing that is not often mentioned is that the Government reduced it’s spending after the war. I am no fan of the FED but as long as the Government spends disproportional to GDP we can’t expect the FED to reduce the money supply for very long. The US debt increased more in the past 10 years than during the preceding 232 years. What could go wrong? Historically this is no new. That’s always how Government have ended the destruction of their economies. As you pointed out the US as a big advantage for issuing the world reserve currency. So who knows how long this paper can be exported against goods?

      • Gandalf says:

        Plastic Money,

        The point of the 90% marginal tax rate wasn’t to raise massive amounts of tax revenue, but to serve as a cap on the top salaries that people could earn. Earn more than that and the government would relieve you of the burden of that excess money by taking 90% of it. This was Bernie Sanders Paradise, a government mandated leveling of income

        Say what you will about the tax deductions (and the rich of today still have lots of them), but these were usually the product of lobbying by special interests hoping to promote their industry with a tax deduction.. You could earn more than that 200k but if you bought or did something with that money that was tax deductible, the government was ok with that and was not going to make you pay 90% tax on the extra money. So think of it as a highly regulated way of earning more than that salary cap, usually by spending that money

        The economic system becomes low gain because there is obviously less incentive to make huge amiunts of money. But the risks and abuses of this system are lower, if combined with strict financial regulation because now you can’t become a multi-millionaire by selling bad junk bonds or by running a private equity firm and doing asset stripping and raiding worker pension funds. If you did all that, your reward would be that 90% marginal tax. Haha

        As for the federal government reducing spending postwar, of course. The US built over 100,000 aircraft, and over 100 aircraft carriers, including over 30 of the top of the line fast carriers during WWII. That required a huge anount of Federal deficit spending. When the war ended, aircraft and tanks coming off the assembly lines went straight to the scrap yards.

        Truman slashed the armed forces, tried to abolish the Marines, and until the Korean War changed his mind, refused to let the Navy build any new classes of aircraft carriers as it was believed the atomic bomb would quickly end all future wars.

        Eisenhower was equally stingy with the military, but did find room in the budget for the first ever Federal funding of higher education, and started the construction of the National Highway system

  24. Hugs says:

    Mortgage interest rates are going to run between 5% to 10%. Inflation is going to run 10% or more for a while and then flirt with whatever the mortgage interest rate is doing. I’m basing this on what I’ve observed since 1970. Everyone is rattling sabers. That means big deficits to pay for weapons. Full employment. Probably a new baby boom in the US.

  25. WSKJ says:

    following on discussion above, Petunia:

    If you cite some references for your statements, we have grounds for a discussion.

    In the meanwhile, i find the following interesting:, 2016, chart and short post re”…interest rates since 3000 BC”. This post was based on a speech by “the Bank of England’s Andy Haldane” and a list of his references is given.

    I find specific interest rate quotes difficult to find for 1756, so I thought that Franklin’s autobiographical anecdote re 5% paper quite interesting….not to mention that Haldane’s list includes “England, 1700s: 9.92 %”, apparently a rate paid on 6-month East India bonds (however, I don’t claim to be informed re BoE interest rates for the 18th C., and you may well be accurate as to 3 % being the typical rate paid, at least in the 1st half of that century).

    I can’t let you call the Franklin 5% orders “junk bonds” for the reasons I have given, and others, that’s all.

    Wolf, with your permission I will, from time to time, post a few other data points on interest rates of the past, which I come across in my reading. Only in commentary on your posts which speak to current interest rates, of course.

    How can we think about VLIRPs, ZIRPs and NIRPs if we don’t have a basis for comparison ?

    • WSKJ says:

      ERRATUM above: apparently the listing of East India paper at 9.92% is from data from “The Trader and His Shadow”….does sound less authoritative than “Andy Haldane, Bank of England”.

  26. backwardsevolution says:

    Wolf – I distinctly remember Trump saying during his campaign that it wasn’t fair that older people who had worked hard and saved their money were being penalized with low interest rates. He said it after one of his campaign trips to the Rust Belt where he spent some time talking to older people.

    I don’t think that Trump is upset over rates rising, but I think he has to pretend he is. If he came out and said, “Good, rates are finally rising,” he’d be vilified. This way he gets to blame Powell.

    Holding rates down, as the Fed did, for such a long time has produced winners and losers. As you said, now the “losers” will have a little bit of interest income and will start spending again.

    Thanks for all you do, Wolf!

Comments are closed.