“We take our responsibility seriously, with humility and with resolve.”
– Federal Reserve Chairman Kevin Warsh, August 28, 2026
Same Old Price Fixing
Last week Fed Chairman Kevin Warsh delivered his debut alpha dog speech from Jackson Hole, Wyoming. It was titled “In Our Time,” and was billed as a broad blueprint for how he intends to govern. Namely, he wants a quieter Fed.
“We should not indulge a regime in which market participants are looking primarily to the Fed for their next trade.”
This is a nice sentiment. It sounds good coming out of Jackson Hole. But it doesn’t really change anything. Wash is merely smiling through his teeth, while talking out of his neck.
He says he wants to pull back the Fed’s verbal influence. Yet he wants to leave its mechanical influence completely intact. He wants a quiet central bank, but he still expects to sit in a room with twelve people every six weeks and fix the price of credit for a $28 trillion economy.
Philosophically, the core presumption remains unchanged. That a committee of central planners believes it can calculate the correct price for borrowing money better than the open market.
This is inherently flawed. Central banking in the United States over the last 113 years has proven that attempts to mandate an artificial interest rate don’t eliminate the true, market-driven cost of money. They simply break the price signals of trade and create unintended, destructive consequences.
Consider what the Fed is attempting to do ahead of the September 15 and 16 Federal Open Market Committee (FOMC) meeting. Warsh and his cohorts are looking at aggregate economic data reports and then debating whether financial conditions are restrictive enough.
Warsh himself admitted at Jackson Hole that “our knowledge just doesn’t extend that far” when it comes to constructing reliable economic forecasting models. He also called “to be modest about what we can and cannot know.”
This is an honest admission by Warsh. But he’s still dishonest with the Fed’s intent.
Judicious Vulgarity
You see, the Fed isn’t endeavoring to preserve the dollar’s purchasing power for the benefit of workers, savers, and retirees. Rather, it’s endeavoring to achieve moderate debasement for the purpose of financing Washington’s massive $40 trillion debt.
We’ll explain why this is becoming more difficult and what this means for you and your money in just a moment. But first, some context is in order.
Here at the Economic Prism, we’re blessed with the unintended joys that American capitalism delivers each and every day. Did you know, for example, that if you bite off the ends of a Red Vines licorice you can stick it in an ice-cold can of Coca-Cola and use it as a yummy straw?
Several decades ago, we worked with an older fellow who was casually uncouth. Together, we tackled the challenges and demands that come with selling and delivering services that come with no real product.
From our perch on the 50th floor of the City National Plaza South Tower at 555 Flower Street in Downtown Los Angeles, he’d frequently string words together into vulgar displays of language. This was done to effectively characterize the painful business predicaments we were faced with.
Once, during a particularly ugly contract dispute, our former colleague, who was a living testament to the success a B-rate player can have if they get after it each day with outsized confidence, commented that they had our ‘balls in a vise.’
Crude. Uncouth. Vulgar. And exactingly accurate.
To be clear, we eschew vulgarity for vulgarity’s sake. There are many words that can be used to communicate ideas and meaning without being crude and obscene. On occasion, however, vulgar language is irreplaceable in the meaning and imagery it delivers.
What follows is such an instance. Thus, we’re using vulgarity with judicious discrimination.
‘Balls in a Vise’
The 10-year Treasury note yield continues its swift assent towards 5 percent. The last we checked, it was over 4.8 percent. Similarly, the 30-year Treasury bond yield was over 5.28 percent.
These rates are above the levels that triggered Treasury Secretary Scott Bessent’s market intervention in mid-August. Bond investors continue to demand higher yields to compensate for the greater risk of holding government debt in the face of elevated consumer price inflation.
If you’re a saver, higher rates are generally a benefit – so long as the rates do not rapidly rise even higher. You earn more from lending money to the U.S. government or sticking your cash in a high-yield savings account.
If you are a borrower, prepare for greater pain. Treasury yields influence everyday borrowing, setting the benchmark for mortgages, business loans, and credit cards. When yields spike, mortgage rates follow, the housing market cools, and corporate refinancing forces zombie companies to go belly-up.
So, too, the federal government must use more and more of its budget just to cover its interest payments.
Of course, this couldn’t come at a worse possible time. Everyone is up to their eyeballs in debt. U.S. credit card debt hit $1.26 trillion in the second quarter alone, jumping $21 billion and edging up toward the all-time record of $1.28 trillion set late last year.
Moreover, Washington’s spending is completely out of control. The Congressional Budget Office expects this year’s budget deficit to exceed $2 trillion, which is about 6 percent of the entire U.S. economy. When you add up decades of runaway deficit spending, the total national debt has officially pushed past $40.1 trillion, coming out to over 120 percent of gross domestic product (GDP).
While government deficits explode, and Warsh speaks of a quieter central bank, Bessent is busy executing debt buybacks to manage liquidity on the long end of the yield curve. That’s because as bond yields rise, the vise tightens.
Borrowing is getting more painful by the day for ordinary consumers, businesses, and the government alike.
Varying Pain Tolerances
When looking at the crushing weight of modern debt and climbing bond yields, the U.S. isn’t alone in its misery. Across the Pacific, Japan provides instructive guidance for what happens when decades of deficit spending finally catch up with structural realities.
With Japan’s 10-year bond yield hitting 30-year highs of 3 percent and its national debt sitting at a staggering 245 percent of its GDP, Tokyo is caught in the exact same fiscal vise as Washington. Both nations face immense economic pain as higher interest rates collide with massive liabilities.
For the U.S., a huge amount of federal revenue is rapidly being consumed just to service the interest on its $40 trillion debt pile. Japan faces a parallel crisis, where even a slight uptick in yields threatens to overwhelm the national budget because their debt-to-GDP ratio is more than double America’s.
When borrowing costs rise against a backdrop of historic indebtedness, governments run out of options. They must either cut spending and balance the budget or print more money, which fuels the inflation fire.
There is, however, a crucial difference between the two nations and the pain tolerances they can endure. Japan possesses a massive structural advantage thanks to its exceptionally high domestic savings rate.
Because Japanese households and domestic institutions, in addition to the central bank, fund most of the government’s debt, Tokyo relies far less on foreign investors. This insulates Japan, allowing it to handle elevated debt burdens that would likely trigger a rapid capital flight and currency crisis in a more consumption-driven economy like the USA.
While a higher domestic savings rate affords Japan a higher pain tolerance, it cannot escape the impact of a tightening vise forever. As global yields march upward and interest expenses consume larger shares of national income, the cushion provided by domestic savings in Japan will wear thin.
Ultimately, both economies are getting squeezed by higher rates and massive debts, and no amount of central bank or Treasury intervention can sidestep the reckoning ahead.
What all this means is that your money is at risk. Physical gold bullion, in private possession, is imperative.
[Editor’s note: Get a free copy of an important special report called, “Anti-Fragile Bargain – Why You Should Own this Monster Dividend Fortress,” when you join the Economic Prism mailing list today. If you want a special trial deal to check out MN Gordon’s Wealth Prism Letter, you can grab that here.]
Sincerely,
MN Gordon
for Economic Prism
Return from Modest Reflections on Varying Tolerances to Extreme Pain to Economic Prism
