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Many longtime readers know that I’ve remained bullish on U.S. bonds. Especially at the long end of the curve (the 5-year through 30-year).

And I know many may be thinking – “bonds? Are you kidding? In this inflationary and tightening environment?”

I get it – but still. There’s a good reason for this.

For instance, in both this multi-decade high inflationary period as well as the Fed’s most aggressive tightening path since the 1980s, the U.S. 10 yield is still under 4%. And barely at its 2008-09 levels.

Just take a look at the last 60 years between U.S. consumer inflation growth (red line) and the 10-year yield (blue).

There are three big things here.

1. Between 1980 and 2007, the 10-year rate stayed above the annual inflation rate.

2. And even though inflation stayed relatively anemic, interest rates fell lower and lower.

3. Until eventaully – post-2008 – annual inflation began surpassing yields.

So, what gives? Why are interest rates seemingly stuck perpetually sliding lower and lower even as inflation rises and the Fed tightens?

Well, I have a hypothesis.

And that is the global savings glut – aka more savings relative to investment – that’s desperately looking for yield anywhere it can find it. Thus grossly suppressing yields, and returns on investments (ROIs), and keeping the bottom 90% of U.S. households drowning in debt.

Let me explain why. . .

So – What Exactly is a Savings Glut?

Putting it simply, a savings glut means that there are too many excess savings compared to desired investments.

And as taught in economics, savings fuels investment. So when there are too many savings chasing fewer investment opportunities, yields will sink lower and lower. (Imagine a thick blanket of savings weighing down yields as it’s looking for an ever-smaller pie of returns).

Or – said another way – the very wealthy (top-10%), global corporations, and surplus-running nations – like China, Japan, the Eurozone, Saudi Arabia, South Korea, etc – have seen their savings compound faster than growth, investment, and the demand for money. Thus keeping rates chronically low.

And this is a structural and global phenomenon.

Now, many might not remember, but back in 2005 the former Fed chairman – Ben Bernanke – said that he believed the global savings glut was leading to the following:

1. A chronic U.S. deficit.

2. Slower economic growth

3. Deflationary pressures.

4. And perpetually lower interest rates

And while I don’t agree with Bernanke on many things – I actually do here.

Because this is exactly what’s happened since the 1980s. . .

But the worst part about this is the long-term fragility it creates in the U.S.

Because savings compound faster than productive demand for it, the pressure falls on the U.S. government and everyday households (bottom 90%) to borrow.

Thus creating a ‘debt-trap’ – which grows ever closer to a tipping point. . .

Excess Savings Have Compounded Far Faster Than Productive Demand – Thus Banks Must Find New Outlets (The Bottom-90%)

For starters – on the demand side – net-private domestic business investment as a percentage of the U.S. economy has plunged more than half in the last 40 years.

Meaning that the demand for money has been anemic as companies have invested less and less.

This reduction in business investment has reduced the need for savings (and it’s also weighed down growth since business investment is a key driver of aggregate demand and economic growth).

Then – on the supply side – the savings of the U.S.’s top-1% and foreign capital flowing into the U.S. have compounded far faster than investment needs.

And this compounding has led to a surge in credit creation and lower interest rates.

Why?

Because banks need to find an outlet for all this excess savings (they owe interest on it after all, so they need it to generate income first).

Thus more savings begets even more savings.

Remember what Albert Einstein said? “Compound interest is the eighth wonder of the world.”

And when there’s more supply relative to demand, prices – or interest rates here – must fall.

So, if businesses aren’t investing. And the rich continue growing wealthier. And foreign nations – like Japan and China and Germany – are dumping their excess savings into the U.S., where does all this money go?

Well, historically, it’s everyday households and governments that end up forced to absorb it all. . .

For perspective – take a look at U.S. household net debt as a percentage of income over the last 40 years.

Recent Chicago Booth research shows that since the 1980s – wealth inequality soared in the U.S. as the richest 1% of households saw their savings explode.

Thus as their wealth grew, lenders effectively used this glut of savings to finance the debt of the bottom-99%.

Why has this happened?

Well, the researchers make note that the wealthy aren’t exactly shying away from productive investment in order to finance households and government deficits instead.

But rather productive investments have hit the law of diminishing returns.

Thus it’s more lucrative for lenders to deploy these savings onto U.S. consumers and governments (who are always willing to borrow).

Or – said another way – the top-1% has essentially pushed the bottom-99% into a ‘debt trap’.

But this has come at a steep cost. . .

Because – since the 1980s – the excess savings financed ever greater debt burdens, and widespread returns were forced to decline as well as push interest rates lower and lower. Creating a vicious feedback loop.

So as returns diminished, investors were pushed further out on the risk-reward curve looking for higher returns.

And this is the ‘debt trap’ that the bottom 90% find themselves in.

Because the rising wealth of the rich fueled cheap debt, malinvestment, and rising asset prices. Causing inequality to grow even wider.

But never forget that when unproductive debt’s involved – fragility grows.

And that’s the problem U.S. households and the economy are now in. . .

“Debt-Trapped” – How Rising Household Debt Always Comes at A Cost

Almost all of the largest boom-and-busts throughout history were driven because of leveraged speculation in assets.

And eventually – when those debt burdens became unsustainable and couldn’t keep pushing asset prices or spending higher – a tipping point was reached. And the bust phase began as asset prices plunged relative to nominal debts; sending deflation rippling through the economy.

This is why today’s soaring debt burden matters.

Because households will grow less willing to borrow ever-larger amounts.

And eventually, things will hit a wall as consumers are forced to deleverage instead (pay down debts instead of borrowing new debt). And growth will depend on wages alone.

But that’s the dilemma – because according to the Economic Policy Institute (EPI) – U.S. household wages for the bottom 90% have barely grown in 40 years.

For perspective, the bottom 90% only saw real annual wages rise 28% in the last 42 years – while the top-1% saw a nearly 180% increase and the top-0.1% rose 400%.

And it’s only gotten worse since 2021 as higher inflation has eroded wages even further.

This is why wages alone will not be able to sustain growth.

Cheap debt financing has allowed the bottom 90% to supplement their incomes and spending habits. Which is “good” for the economy (and especially for the wealthy).

But once the debt binge ends – it’ll lead to anemic consumption, weak growth, chronic deflation, and lower interest rates. Which almost always follows after deleveraging cycles – for example, Japan post-1991 and the U.S. post-2008.

Putting it simply, the excess savings that have created a debt trap for consumers is a ticking time bomb. . .

So – in summary – the rich’s wealth continues compounding faster than productive investment demand.

Meanwhile the current account surplus-running nations – like China, Japan, Germany, South Korea, and Saudi Arabia – are dumping their excess goods and savings onto the U.S. Thus flooding our banks with more money that needs to be put somewhere.

And this keeps U.S. households and the government stuck absorbing the excess.

Because if they don’t, growth will contract sharply around the world as demand erodes.

In fact, it’s not a stretch to say that both U.S. households and U.S. deficits are carrying the global economy at this point.

But beware, because ever-rising debt burdens can’t keep the world economy and asset prices rising forever.

And this is why I believe that the longer-duration bond yields will stay relatively lower. And continue sinking over time.

Because there are just too many excess savings looking for yield amid a dearth of investment. Crushing returns and creating a debt trap that leads to economic fragility, lower growth, and deflation.

Keep in mind that the Fed may control the short end of the curve, but the yield-starved investors and excess savings control the long end.

And I believe this glut is only going to deepen. . .

*PS – this is a rather complicated topic and I’m only going over some parts and simplifying it. But I will write a follow-up article highlighting how the forced surplus running nations also add to U.S. inequality and debt traps.

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