There are a lot of different reasons why the private sector cannot be “unleashed” on its own the way so many of these ideological adherents posing as “common sense” reformers believe it can, and I want to focus on one very obvious one that has a big effect on interest-rate sensitive industries like housing. Vaheesan’s critique focused a lot on evidence from the past that debunks many of Klein and Thompson’s claims, but one of the biggest hurdles to enacting this agenda is currently unfolding in the bond market, which is not a Trump-centric dynamic. Investors are not selling 20- and 30-year US Treasuries en masse because they think Trump is going to be president at 108 years old. America has a new risk premium attached to it that will outlive Trump.
Long-term investments cost a lot of money, and the way that major capital expenditures are typically financed by companies is with long-term debt. If the abundance agenda feels like it has the vibes of some tepid Obama-era pablum, that’s because its entire theoretical basis is poisoned by member berries pining for the days of zero interest rates policy (ZIRP) where their ideas to unleash the private sector would have been much more profitable.
The thirty-year Treasury Bond that serves as the “risk-free” rate for thirty-year debt opened January 2009 at 2.679 percent, and it reached a pre-COVID low of 2.089 percent in June 2016. As I write this, the thirty-year is at 4.999 percent. The one-year Treasury Note spent Obama’s entire eight-year term under 0.774 percent—it’s currently at 4.128 percent.
Debt is more expensive now in post-COVID crash America. A lot more expensive on a relative basis to a decade ago. Especially with a GOP Congress and president dedicated to blowing out the deficit so they can take healthcare away from poor people to pay for tax cuts for the ultra-rich. America’s credit first got downgraded under Obama in 2011 because of the risk our horribly broken and inefficient political system poses to our debt, and it just got downgraded again under Trump because of what his “big, beautiful bill” will do to it. The days of being able to finance large-scale investment at low interest rates seem to be behind us, unless another 2008 or 2020-style deflation crisis forces that kind of drastic policy change dropping rates to zero again.
Ever since they started hiking interest rates after inflation spiked in November 2021, central bankers at the Federal Reserve and European Central Bank have been adamant that they don’t want to go back down to the zero percent interest rates established in the wake of the 2008 crisis. It led to way too much froth in the market and made it so wildly inefficient that doofuses like Marc Andreesen became some of the richest and most powerful humans to ever exist while the stock market’s first memecoin created the wealthiest man on earth who currently runs a carbon credits company that sells a couple of cars. Silicon Valley gained an inordinate amount of power off Venture Capital’s ability to borrow money at near-free levels, and play their typical “bet on ten companies, hit one and get rich” strategy. This was aided by the fact that low-interest rates helped their companies become more valuable by inflating the present value of their future cash flows, which is calculated as such: Future cash flow / (1 + risk-free interest rate) ^ time
So if you projected your new fancy abundance company to make five million dollars in five years, that future cash flow was presently worth about $4.7 million under Obama-era interest rates. Today, it’s worth about $4.1 million under Trump stagflationary fears. That’s nearly a 13 percent reduction in projected revenue you can claim today, solely because one number in the denominator changed (if you were wondering why all the Silicon Valley oligarchs are losing their minds right now).
While stagflation is not necessarily the fear that Democratic policymakers should have given what Build Back Better did and the centuries of knowledge we have about how various kinds of government investment that Dems favor have beneficial multiplying effects on the economy, but interest rates for America are going to be higher going forward, making investments more expensive. That is what the credit downgrades, bond market, and investors fleeing the inherent duration risk we present on the long-end of the yield curve are all telling us right now.
Duration risk is simple to understand for the layperson, as it’s just the risk that inflation will rise, and the longer your bond investment horizon is, the more time you have to worry about inflation eating into your real returns. “Deficits don’t matter” was a correct take under Obama because of the simple math that lower debt multiplied by low interest rates presented under a stable economy–plus the fact that United States debt is perhaps the most valuable financial asset on the planet, so it’s not debt the way that you or I or even the Democratic Party’s future Klein/Thompson housing developments have debt. America’s debt is something of a boogeyman, but the interest expense we pay on it is something that has a tangible impact on us every year.
Now interest expense is really hitting us hard in a world with higher inflation–it exceeds what we pay for defense and will comprise 16 percent of federal spending this year, and this is not a simple problem to fix. The issue that deficits present is they require issuing more debt to pay for them, and this increased supply of government bonds will drop bond prices, and since yields move inversely to bond prices, interest rates should rise along with the deficit, making it more difficult to invest and grow our way out of economic ruts. The math on this is unavoidable, and the 20-year and 30-year Treasuries are currently telling us that this is going to be one of Trump’s many long-term impacts on America. JPMorgan’s Jamie Dimon says it is inevitable that there will be a “crack in the bond market,” he just doesn’t “know if it’s going to be a crisis in six months or six years.”
The abundance agenda is simplistic centrist pablum for a lot of reasons, but one of the main ones is its assumption that simply getting out of the private sector’s way will produce a wave of investment, which even in past eras with lower interest rates has not always been the case. Red tape is a problem in housing, but it is not the only one, as high interest rates helped make 2024 the worst housing market in thirty years while housing just experienced its weakest April since 2009. I know a lot of us miss the Obama era, but those extended ZIRP days are gone forever, and we are entering a brand-new world that will require new ideas other than “just let the private sector figure it out,” especially when one of the things we know it can figure out is that fewer investments will be profitable under higher interest rates.
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