Natural Rate of Interest

Cost of Money Edition

It’s been a wild ride for bond yields in recent weeks. What causes these gyrations?

The dynamics of the cost of money have been a source of much confusion. The Federal Reserve sets ranges. But if a business owner or home buyer wants to secure financing, the rate is set by supply and demand. This mechanism is known as the natural rate of interest.

There is a balance in the cash supply between savings and investment—when one goes down, the other goes up. When there is higher government spending (investment), the cost of cash is higher because there are fewer savings. While treasuries have rebounded in recent weeks, it appears the market has reset the cost of money.

Models created by Bloomberg Businessweek suggest the 10-Year will permanently remain priced above 4%. If the economy should falter in the future, the Fed would try to drive interest rates lower, but the market—sensing greater risk in U.S. treasuries—may resist, only amplifying concern that we are in a long-term price-debt spiral with higher bond yields.

Driving the Cost of Money: Bad Deficit Math

Driving the Cost of Money: Bad Deficit Math

This year, the U.S. government will pay a staggering $700 billion in interest alone. This graphic published by Mauldin Economics informs on the ongoing stalemate in Congress:

Figure

Corporate taxes comprise about 10% of U.S. revenue (such an amusing word), and estate taxes around .1%. While great fodder for Sunday political programs and speeches, increases to these taxes will not move the needle. Any serious debate on raising revenue must include raising marginal tax rates, as personal taxes make up half of the government’s income.

Similarly, on the expense side, cutting military spending (which is not going to happen in the current environment) would only be a cosmetic fix, and would impact U.S. employment. The big dollars are in entitlements.

So here’s the rub: both sides of the aisle are unwilling to discuss rational solutions because it is political suicide. Both sides need to compromise, with some combination of higher marginal tax rates, changes in retirement age, less government discretionary spending (such as Department of Education, Energy, etc.). The day of reckoning is coming, and it will be unpleasant.

How Workplace Flexibility Can Be a Competitive Advantage

Workplace Flexibility

Our Hybrid Gap white paper and other studies reveal a common trend—flexibility is among workers’ most important criteria when choosing an employer. Yet their definition of flexibility differs greatly from the managers they work for.

A 2022 Gallup poll revealed insight on which workplace flexibility options employees value. Of particular interest are those that would incent them to change jobs. In the illustration below, the lower right quadrant reveals employer attributes that could be a form of competitive advantage.

Among the attributes employees value, expanded PTO, remote work options and 4/10s are those that can move the needle.

review image

This illustrates the pain point for employers. Benefits such as PTO are costly, but they do provide employees the ultimate choice on where and how to spend their time. Employers are well-advised to find the right balance between controlling how employees work, and the freedom that allows them to be the best version of themselves.

Featuring Marc Emmer for Vistage: Strategic planning guide for leaders & business owners

Strategic planning guide for leaders & business owners

For successful organizations, few tasks are as important as strategic planning. As business professor Lee Bolman once said, “A vision without a strategy remains an illusion.”

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Video: Key Performance Indicators

Podcast recommendation – Are Private Equity Firms Plundering the U.S. Economy?

Podcast Recommendation - Freakonomics

They say they make companies more efficient through savvy management. Critics say they bend the rules to enrich themselves at the expense of consumers and employees. Can they both be right? (Probably not.)

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