High Debt and High Inflation US Economy May Face Another Lost Decade

Coin World News Report:
Compiled by Liu Jiaolian
Jiaolian’s Comment:
After the unexpected 50bp interest rate cut by the FOMC in September, many self-media, experts, and financial advisors came out to promote bond investments and encouraged everyone to invest in US bonds. They presented a seamless financial common sense: when interest rates go down, bond yields go down and bond prices go up. Jiaolian has repeatedly reminded in internal references and articles to pay attention to the occurrence of “counterintuitive” situations, but there have still been many unfortunate cases. On September 18th, when the Federal Reserve decided to cut interest rates, the 10-year US Treasury yield was 3.705%. Today, just over a month later, it has soared to 4.224%. In other words, investing in US bonds has already incurred a loss of more than 12%—which is quite significant for an investment considered relatively low-risk like bonds. If leverage is involved, the feeling will be even more sour. A sentence that has been proven true time and time again:
An investment opportunity that is 100% guaranteed to make money will most likely result in losses.
If something is guaranteed to make money, you may not even know about such an opportunity. And if a pie falls from the sky and is served to you by a financial advisor, it is most likely a poisoned pie. Below, Jiaolian has translated a post by netizen Porter Standsberry, revealing the truth behind the recent abnormal increase in US bond yields following the Federal Reserve’s interest rate cut.
“Everyone has a plan until they get punched in the face.”
This is the situation Jerome Powell (Jiaolian’s note: the current Chairman of the Federal Reserve) is facing as the bond market retaliates against the Fed’s best plan to lower borrowing costs.
After Powell cut the overnight rate by 50 basis points on September 18th, the yield on long-term bonds such as 10-year US Treasuries went in the opposite direction, soaring by 50 basis points.
This shouldn’t have happened…
Under normal circumstances, when the Fed and the market are in sync, long-term borrowing costs should follow the overnight rate set by the Fed. But when the Fed makes a policy mistake—such as cutting rates before a presidential election despite high inflation—the market will retaliate.
We have seen this situation before, here’s a spoiler: the outcome is not good.
In 1971, despite inflation exceeding 4%, Fed Chairman Arthur Burns still cut rates to improve Nixon’s political prospects in the 1972 presidential election.
Lowering rates under high inflation entrenched price pressures in the US economy. American workers worried that continued price increases would erode wages and began demanding higher salaries.
This led to a self-reinforcing wage-price spiral that brought a decade of double-digit inflation, destructive interest rates, and stagnant economic growth—a toxic combination known as “stagflation.”
To ultimately curb inflation, the Volcker-era Fed raised the overnight rate to 20%.
But during this period, US investors experienced a “lost decade” with negative real returns on stocks and bonds. The price level of the S&P 500 index in 1979 was the same as in 1968…and considering the rampant inflation of over 50%, stock investors lost half of their funds in real returns.
Bond investors fared no better, as 10-year Treasury yields, adjusted for inflation, lost 3% annually, leading to a decline in purchasing power of about 30% over the decade.
This was the worst decade for investor returns since the Great Depression.
In this post, I will explain why all signs indicate that this situation will repeat itself in the future.


Unlike stocks, which often temporarily offset economic gravity during extreme optimism (like today), the bond market is much more strict. For fixed income investors, inflation is the number one enemy—an invisible thief that can turn positive nominal interest rates into negative real (inflation-adjusted) returns.
Before taming consumer prices, Jerome Powell prematurely lowered short-term rates, repeating the fatal mistake of Arthur Burns’ Fed and fueling fears of entrenched inflation.
Bond investors remember the 1970s. Growing concerns about sustained inflation suppressing real returns have led them to demand greater safety margins, resulting in a surge in long-term borrowing costs, such as the 10-year Treasury yield.
The 10-year US Treasury is one of the world’s most important borrowing benchmarks, determining the borrowing costs of a wide range of consumer and business loans. This includes standard 30-year US mortgage rates, which, influenced by the 10-year Treasury, have surged by 50 basis points following Powell’s recent rate cut.
This has become a big problem because higher borrowing costs actually further fuel inflation. Especially in the housing market, high mortgage rates directly lead to increased housing costs.
Currently, the monthly payment for an average-priced US home is $2,215, which means a yearly household income of $106,000 is now needed to own an average home, compared to $59,000 just four years ago (in 2020).
Unsurprisingly, in the September inflation report, housing costs were one of the biggest winners, rising by 4.9% year-on-year, far surpassing the overall inflation rate of 3.3%.
Meanwhile, the Fed’s rate cut, which was supposed to support US economic growth, is having the opposite effect. Higher long-term rates have not lowered borrowing costs and promoted lending in the real economy; they have had the opposite effect.
We can see from the latest weekly data that new mortgage applications dropped by 17%. Mortgage refinancing saw an even larger drop, with last week’s figures down a whopping 26%.


Higher borrowing costs are not the only factor causing stubborn inflation. Insurance is another major culprit, with costs rising at rates higher than the overall CPI.
For almost every adult American, insurance is a major cost of living and often legally required. Just imagine trying to file taxes without reporting health insurance, applying for a mortgage without homeowners insurance, or driving without car insurance.
Insurance companies suffered significant profit losses in the early stages of inflation after the pandemic, as their policies were priced based on historical inflation rates of 1-2%. Thus, when soaring inflation led to claims far exceeding expectations, they had to bear huge losses.
Now, insurance companies are starting to recoup those losses from policyholders.
In recent years, as old policies expired, insurance companies have made up for the losses by significantly raising premiums for new policies. For example, employer-sponsored health insurance plans are expected to see a 7% cost increase for the second year in a row—about twice the current CPI inflation rate. This is the fastest increase in over a decade and has increased average family health insurance costs by $3,000 in just two years.
At the same time, premiums for home and auto insurance are also rising at double-digit rates, as those who renewed their policies recently can attest. With the expectation that two consecutive devastating hurricanes will cause massive losses for insurance companies, the industry will further raise rates to make up for these losses.
These and other stubborn costs are the reasons why various “core inflation” indicators from the Fed, excluding volatile food and energy prices, stubbornly remain above 3% even after the CPI’s latest inflation data fell below 2%. And if we analyze median prices in the CPI basket, inflation has consistently remained around 4%.
It is worth noting that this is also the inflation floor that the Fed failed to break through during the stagflation period of the 1970s.


Despite politicians and media figures doing their best to make consumers believe that inflation has been defeated, everyday Americans living in the real world still feel the erosion of rising prices on their wages.
Now, American workers are demanding continuously higher wages to cope with the cost-of-living crisis.
For example, recently, 32,000 Boeing factory workers went on strike after failing to secure a 40% wage increase over four years. They ended the strike after Boeing agreed to a 35% wage increase over the next four years, which equates to nearly 9% annual growth.
Meanwhile, the International Longshoremen’s Association recently ended its latest strike as employers agreed to a 62% wage increase over the next six years, with an average hourly wage reaching $63.
With such wage increases setting the standard, it is clear that inflation is entrenched in the US economy, fueling the flames of the wage-price spiral seen in the 1970s.
The following chart will soon become a nightmare for the Fed, showing consumer inflation expectations soaring to the highest levels in the past 40 years.
With consumers expecting annual inflation rates to exceed 7% in the next 5 to 10 years and continuing to demand higher wages, how long can the Fed maintain the illusion of “mission accomplished” with its interest rate cuts?


US policymakers are repeating the mistakes of the 1970s. They have sown the seeds of a decade or longer of stubborn inflation, rising borrowing costs, and a “lost decade” for the US economy and financial asset prices.
But this time, the situation may be worse. The biggest problem is that the highly indebted US economy can no longer withstand the 20% interest rates needed to curb out-of-control inflation as it did in the 1970s.
The US debt-to-GDP ratio is now 120%, compared to 30% in the 1970s.
If the Fed simply maintains rates at 5% and forces the US government to finance all its outstanding debt at that rate, annual interest payments will soon approach $2 trillion. That’s equivalent to 40% of government revenue each year. If rates rise to 10%, the federal government will be forced to choose between funding Social Security and Medicare benefits or funding the military, as it won’t be able to afford both.
And under a 20% borrowing cost, the US will effectively shut down business. Uncle Sam’s interest payments will exceed its tax revenue each year.
That’s why all roads lead to long-term runaway inflation. Due to the unsustainable burden of US debt, it is no longer a viable option to rely solely on raising overnight borrowing rates to control inflation.
The US federal government is rapidly heading towards bankruptcy, and policymakers are unwilling to admit, let alone address, this problem. Honest default and debt restructuring are clearly not viable options for politicians seeking re-election. Therefore, the only remaining choice is to engage in dishonest default through inflation.
But don’t just take my word for it, look at legendary trader Paul Tudor Jones, who just explained today:
“All roads lead to inflation. I own gold and bitcoin, zero fixed income. The way out of this [debt problem] is to escape through inflation.”
More importantly than what they say, pay attention to the actions of the world’s top investors.
Watch Stanley Druckenmiller, who just made a massive short play on long-term US Treasuries. Watch Warren Buffett’s Berkshire Hathaway and Ray Dalio’s Bridgewater Associates, who are selling bank stocks like outdated goods.
This weekend, I was told by several “keyboard financial masters” that the problems I warned of at Bank of America were just “small potatoes.” When I warned of the crises faced by Fannie Mae, General Motors, and more recently Boeing, I heard the same objections.
These judgments don’t require any genius; they are simply mathematical problems on balance sheets. And today, the banking industry is no different.
Bank of America is currently facing a broken bond portfolio, with losses equal to half of its tangible equity value. If long-term rates exceed 10%, Bank of America will go bankrupt.
Of course, you can hope that monetary and fiscal authorities will prevent this situation from happening.
But as they say, “hope” is not a strategy. [1]


1: Jiaolian’s note: This sentence means that relying solely on “hope” is not enough to deal with real-world problems or challenges. It emphasizes the powerlessness of hope, especially in the face of a severe economic and financial crisis. While hope can motivate people, it is not an effective method or strategy for problem-solving. Effective strategies require concrete actions and plans, rather than just hoping for things to improve. Therefore, the author here emphasizes that relying on hope without taking practical measures is not feasible.