Some people believe the US is trying to create a recession so they can lower interest rates. There is a lot of US debt that is up for renewal later this year and a lower interest rates would mean lower costs. The only problem with that theory is the math doesn't work.

Let's approximate that the US has $36 trillion of total debt, with approximately $15 trillion coming due in the next two years and approximately a $30 trillion of GDP. If we assume that a recession lowers interest rates by 2% then they the government will save $300 billion per year in interest payments however, historical budget deficits during a recession are typically around 4% of GDP which would equal $1.2 trillion. Spending $1.2 trillion to save $300 billion is not good math. Unless, of course, it's my daughter talking about how much money she saved purchasing clothes online!

The only way the US can deal with their debt problem is cutting spending [BTW Canada is in a very similar position]. Tariffs, lower interest rates and increased taxes will not fix the US debt problem. Lower spending, which will also reduce interest rates because it will slow down the economy, is likely the simplest solution to their debt problem.

I have also included a note from our CIBC Economics team entitled “The tempest in Treasuries”

As always, if you have any questions, please feel free to give us a call.

Have a great long weekend.

Milan