by Thorsten Polleit
Interest rates are rising worldwide. For example, the ten-year yield on U.S. Treasuries has reached 4.80 per cent, the thirty-year yield 5 ½ per cent, the highest levels in 20 years. Although interest rate levels differ (quite substantially) from one currency area to another, credit costs are climbing everywhere. We have repeatedly pointed to the extremely important “interest rate problem” in previous issues of Dr. Polleit’s BOOM & BUST REPORT. The reason: The interest rate is probably the most important variable for financial market activity. It is essentially embedded in every financial market price—whether stocks, bonds, real estate, or commodities: All these prices ultimately depend on the interest rate. And rising interest rates exert downward pressure on financial market prices.
But it is not only prices on the financial markets that feel the effects of rising interest rates. Consumption and production will be affected as well, directly as well as indirectly. For instance, peoples’ consumption expenditure financed by borrowing becomes more expensive, and firms’ investment projects no longer pay off. As a result, demand declines, corporate profits fall, jobs are lost, and the economy weakens. Credit defaults accumulate, and banks hit the brakes on lending. The downturn intensifies—and all of this in turn has a negative impact on stock and some bond prices (especially those of banks and companies).
What is more, rising interest rates are particularly problematic because debt levels in many economies around the world are already very high, and the staggering pyramid of debt has been built up in a period of ultra-low interest rates. In addition, it should be noted that maturing loans are de facto not repaid on a net basis but are replaced by new loans that (so the debtors hope) carry a lower interest rate. That said, not only heavily indebted consumers and producers, but above all overstretched public finances, get into trouble when interest rates rise. It becomes increasingly difficult for them to service their debt. And pressure is already building up in the interest rate market.
In the BOOM & BUST REPORT of August 13, 2026, we already reported that the U.S. Treasury intends to make greater use of the so-called “FIMA Repo Facility” of the U.S. central bank (Fed) in order to counteract a possible rise in yields in the market for U.S. Treasuries. But that is not all: On August 19, 2026, U.S. Treasury Secretary Scott Bessent also announced that the U.S. Treasury would henceforth double its bond buybacks (from $2 billion to $4 billion per auction). One must understand: The U.S. Treasury issues bonds and uses part of the proceeds to buy back previously issued bonds. This is intended to achieve three things:
(i) The U.S. Treasury provides liquidity for long-maturity bonds (from 10 to 30 years), thereby encouraging investors to continue holding their long-term U.S. bonds and to buy new ones.
(ii) The buybacks somewhat moderate the increase in the supply of long-term bonds and thereby reduce the upward pressure on yields for long-term debt securities.
(iii) The Treasury buys back long-term bonds using the money it raises by issuing short-term bonds (also known as “Operation Twist”). Financing thus shifts from long-term debt securities (with higher interest rates) to short-term debt securities (with lower interest rates).
In view of all these “technical market interventions,” the investor will now ask: Where is all this leading? To answer this question, it is useful to think through some basic scenarios. Below, four scenarios are briefly examined.
- Scenario 1: Governments turn the tide, reduce budget deficits, and pursue a growth policy.—This would undoubtedly be the “best of all worlds.” The economies might then still have the chance to grow their way out of their debt burdens in the true sense of the word. Government spending could be reduced and taxes lowered over the medium term, thereby supporting consumption and investment and raising incomes. Although it is not entirely impossible that such a rethink might still occur, it is (unfortunately) not very likely.
- Scenario 2: Interest rates shoot up, the debt pyramid collapses, and drags the economies down with it.—If confidence in the credit markets evaporates completely because interest rates climb to unaffordable levels, the fiat money system also collapses. Debtors default en masse, and banks suffer losses. They lose their equity capital, and a large part of peoples’ savings gets destroyed. The result is a recession-deflation: shrinking production and a collapse in goods prices, wages, and rents. The “crash” would be similar to that of 1929—only presumably much, much larger and more dramatic.
- Scenario 3: The central banks intervene and (fully) control interest rates.—If interest rates rise too sharply and reach politically undesirable levels, the central banks step in. They not only buy (again) government bonds, thereby raising the prices of the securities and correspondingly lowering their yields. They also buy bank and corporate bonds. In addition, the central banks grant direct loans to commercial banks at most favorable conditions so that consumers and producers can continue to obtain affordable credit. Technically, this is quite possible. However, it is foreseeable that sooner or later investors will lose confidence in debt securities and also in fiat money, and inflation will shoot up massively. There will be a major sell-off in the bond market. The central banks will then buy up the flood of debt securities thrown onto the market (in order to push market interest rates down) and pay with newly created fiat money. A wave of high or even hyperinflation would follow, with all the associated highly negative economic and political consequences.
- Scenario 4: The central banks control “only” the yields on government bonds.—To this end, the central banks buy up the debt securities offered in the market and pay for the purchases with newly created money. This will of course drive interest rates for all other borrowers higher (due to rising inflation expectations). Consumers and producers, but also the banks, then get into difficulties: They have to replace their maturing loans with new loans that carry a sharply higher interest rate. Many borrowers run into financial trouble, and quite a few go bankrupt. If the banks suffer high credit losses, they lose their equity capital—and the state intervenes: It obtains new money from the central bank through borrowing and injects it into the banks as new equity capital. The banking system is thus nationalized, and the central bank thenceforth supplies the banks with credit and money on most favorable terms. The foreseeable wave of bankruptcies among consumers and producers then has the consequence that land, real estate, company shares, etc., pass (to a considerable extent) into the ownership of the state-controlled banks. In essence, this is the path to socialism (in which, as is well known, the state comes into possession of the means of production).
It should be added: Scenarios 2 and 4 in particular would very likely be accompanied by major disruptions: The international division of labor would suffer especially severely, and recession and mass unemployment would be particularly high—if only because of the great uncertainties associated with a credit crisis or the related legal and political uncertainties. So what can the investor learn from considering these four scenarios?
(1.) One may hope that things will still turn for the better (Scenario 1). But that is (unfortunately) not very likely; for the incentive systems of the political regimes in the Western world make it rather improbable.
(2.) From the perspective of politically influential and powerful groups, a “really big crash” as in Scenario 2 is presumably not desirable—because it carries the risk of an (entirely unpredictable) loss of control and endangers privileges. And Scenario 4 would only be likely if those who call the shots in the state apparatus and the central bank actually want to inaugurate socialism and are also able to do so unhindered. At the end of the day, however, this can probably not be politically enforced, especially given the severity of the associated crisis.
(3.) And so Scenario 3 appears to be the most probable: unrestrained inflation, the payment of outstanding bills with newly created fiat money. Here, however, one must bear in mind that even an inflationary policy reaches its limits: that when the costs for the population become too great, the electronic printing presses will be switched off at some point. But that will only happen after the purchasing power of money has already been severely diminished. The investor will therefore first have to deal with (high) inflation; in the subsequent period, however, recessive-deflationary developments cannot be ruled out. For theory suugests and monetary history shows all too clearly: When an economy actually exits inflationary policy, all the misallocations (such as overconsumption and malinvestments) that the inflationary policy previously caused become apparent; and the ensuing correction inevitably leads to bankruptcies, price declines, unemployment, etc.
As a result, the central problem that the investor has to solve is the coming, intensifying debasement of money, the accelerating decline in its purchasing power. That is why we (continue to) recommend to investors holding a portfolio consisting of gold (and also silver) as well as shares of companies that have inflation-resistant business models.
If you want to learn more, you should read the Boom & Bust Report. All details are at boombustreport.com.
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