Increasing interest rates put pressure on national debt obligations

Trying to predict the course of commodity prices from one year to the next is a complex task.

It requires a broad understanding of global monetary and geopolitical influences that can be confusing and contradictory.

Arlan Suderman, chief commodities economist with StoneX Group, gave attendees at the recent Ontario Agricultural Conference a robust overview of world conditions that could influence the economies of most developed countries.

Why it matters: An economist cautions that monetary policy in Western countries could have long-term consequences.

He first addressed the failure of modern monetary policy among countries like the U.S., Canada, Japan and the U.K., which spend, tax and borrow without the constraints of balancing an annual budget.

“Put simply, such governments do not rely on taxes or borrowing for spending since they can print as much as they need and are the monopoly issuers of the currency,” said Suderman, citing a passage from Investopedia.

“Since their budgets aren’t like a regular household’s, their policies should be shaped by fears of rising national debt.”

Suderman said that’s why the U.S., Canada and several other countries are facing the problems of the day by printing money to buy debt. The U.S. did that in 2008-09, he noted, and largely got away with it, despite other factors including the subprime mortgage crisis.

“In 2020, we said, ‘we got away with it once, let’s try it again and let’s expand it this time’,” said Suderman.

Then came the pandemic.

“We went home and didn’t know what to expect. We were getting stimulus cheques and spending on Amazon and at Walmart.”

Demand rose for durable goods – cars, computers and home appliances – butting up against supply chain difficulties exacerbated by labour shortages.

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Combined with market projections largely based on fears of a recession, U.S. job openings came up against a central bank that is raising interest rates on smaller companies looking to hire. The U.S. national debt is now $31.4 trillion, he said.

To service the interest on that debt, the country pays $484 billion per year. However, as older debt certificates are renewed, they’re rolled in at higher interest rates. A one per cent jump means another $314 billion, just to cover the interest.

The U.S. and other governments will supposedly have to raise taxes, monetize their debt or cut spending, said Suderman. The challenge is that the U.S. waited too long to address inflation, a process that requires slowing the economy and lowering the unemployment rate. Instead, raising interest rates increase the interest obligation on the national debt and put global credit conditions at risk.

“This is where the failure of modern monetary policy is going to come in,” said Suderman. “As my grandmother used to say, ‘the chickens are coming home to roost’, and that’s going to create some problems going forward.”

The impact of the war in Ukraine and China’s designs on Taiwan are contradictory in how they’ll influence global trade, added Suderman.

Until last year, Ukraine was a major exporter of agricultural commodities and although brokers managed to get much of the grain out of port or through European countries to the west, 2023 could see declines in overall production.

As for China, Suderman said there’s greater risk it will take control of Taiwan, even with stepped up diplomacy and a stunted recovery from the latest COVID challenges.

China is a major importer of commodities, unlike Ukraine or Russia. In spite of its reliance on the U.S., Beijing is working with Brazil, India and Russia — and negotiating to add Saudi Arabia to its list of allies.

China will continue to leverage European countries against the U.S. by leveraging the yuan against the U.S. dollar, said Suderman.

– Read more from Ralph Pearce in Country Guide.