March 7, 2025 – In a riveting discussion on Financial Sense, host Jim Puplava and Professor Richard Sylla, co-author of A History of Interest Rates, unpack today’s fiscal landscape—$37 trillion in debt, soaring deficits, and rising rates. Sylla predicts a secular shift upward in interest rates, warns of inflation as a hidden tax, and questions Trump’s tariff strategy, hinting at global backlash from bond vigilantes. With wit and wisdom, he debates monetization, dollar dominance, and investment tactics, urging short-term bonds over risky long-term plays. Curious how this expert sees it all unfolding? Tune in for the full, unmissable conversation!
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Transcript
Jim Puplava:
Since its original publication in 1963, A History of Interest Rates has become the bible and authority on interest rates. Originally written by a Salomon Brothers partner, it has been updated by Richard Sylla. He's a professor emeritus of economics and a former Henry Kaufman Professor of Financial Institutions and Markets at New York University Stern School of Business. A History of Interest Rates is now in its fourth edition. Professor, I wonder if we could start out: How would you describe the world of finance and interest rates today from your last update in the third edition, and the world we live in now, especially with deficits that are several trillion dollars a year and a national debt that is approaching 37 trillion?
Richard Sylla:
Well, Jim, thanks first for inviting me to chat with you. I always enjoy it. I would say, you know, that last edition of A History of Interest Rates was basically done in 2003, and 2004—it came out, I think, in 2005. And at the time, you know, we'd had this long period of declining interest rates from the 1980s, peaks that were very high, to fairly low rates in 2003. I think there was a bit of an economic slowdown early in this century. And we had 9/11. And the Fed responded to that by cutting its policy rates from three down to—well, they were higher in the 1990s, but they came down to a fairly low level. And what I remember—and this I have to be humble here because what I said in the book turned out to be a mistake later on—I was watching the ten-year note like everybody does, the ten-year yield. And in May of 2003, with the Fed reducing interest rates in the early years of this century, the ten-year yield on a monthly average got down to 3.33% in May of 2003. And then it started up. And, you know, the whole argument of the book, or documented with evidence, is that interest rates seem to trend up and down, you know, for fairly long periods—20, 25, 30, even 35 years. They go up in some long periods and down in some long periods. So 2003 was 22 years after the peak of interest rates in 1981. And I thought that by the time I was preparing that edition, probably 2004, the 3.33% yield on the ten-year Treasury in May of 2003 looked to be a low point. And the Fed was—at every meeting, I think from 2004, 2005, 2006—the Fed raised 25 basis points. And I had a feeling in my bones that that represented a turn in the long—you know, we were entering a new era of rising interest rates. Now that turned out to be wrong because I, and most other people, didn’t know that we would have the great financial crisis of 2007-2009 and the global reset, the Great Recession globally, and that quantitative easing and, you know, almost zero interest rates for some period of time. So, in fact, the downward trend in interest rates that started in 1981 continued after 2003, even though I thought it might have bottomed out then, and persisted right through the 2010s, you know, up to—and then, of course, they persisted even through the COVID crisis with the very low rates. So now they’re—but I would say I’m more confident that this represents a really long-term turn in interest rates. And we can probably expect interest rates to be on a rising trend. I don’t think they’ll get back to, you know, going up to double digits like they did in the 1970s. But I think we have turned a corner, and we can probably look forward to a period when interest rates are trending upward rather than downward.
Jim Puplava:
How does the government, Professor, handle rising interest rates when you have a massive amount of debt? You know, we’re almost at 37 trillion. The annual deficits now are several trillion dollars. So if interest rates go from, let’s say, where they are today in the low fours, we go to five, six, or maybe even—I’ve heard somebody say that we could end up in the 7% range. How does the government handle that with that amount of debt?
Richard Sylla:
Well, it’s going to present a problem for them because, you know, we’ve gotten to the point now where the interest on our debt is greater than what we spend on national defense. That hasn’t been true for decades. And my friend Niall Ferguson, a well-known historian, says that when countries spend more on interest on their debt than they spend on defense, that’s a sign of trouble ahead for them. So how is the government going to handle this? Well, it seems to me, Jim, that the problem we have right now is that if somebody says we need to raise taxes to reduce our deficit immediately, a whole bunch of people say, “No, no, no.” In fact, the even better policy is to cut taxes. So it seems like in the current political situation, it’s impossible to raise taxation—other than tariffs, perhaps. And if somebody says, “Well, then we need to cut spending,” well, you know, that’s unpopular as well. Now, right now, we’re having seemingly spending cuts at the federal level, but I think they’re relatively minor relative to the problem you’re describing of a $37 trillion debt because most of our government spending is on entitlements, which Congress has said can’t be cut. You know, Social Security, Medicare—those are large entitlements, and it’s legislated that they have to be paid, you know, come hell or high water. So I don’t see any sign that somebody so far is ready to cut Social Security or cut Medicare. So then your question is, how is the government going to handle this? Well, I think that the only way that makes things turn out so the books balance, we might say, is if we have a higher rate of inflation. You know, we pay the inflation tax because we won’t pay real taxes, and we won’t allow the government to cut our entitlements. So my expectation is that, despite the fact that the Fed is trying to get back to a 2% inflation level, my own prediction, given our fiscal situation, is that we’re going to have a higher rate of inflation, and we have to pay the inflation tax because we won’t allow spending cuts, and we won’t allow real tax increases.
Jim Puplava:
So that seems to me like the Fed’s going to end up monetizing a good portion of the debt, despite what they’re saying now.
Richard Sylla:
It probably will do that. And, you know, it did that in COVID. And the result, of course, was inflation. You know, all kinds—we mailed out checks to people on a massive scale in the COVID situation. And that created a large growth in the deficit. And the Federal Reserve basically bought those bonds, but in doing so, it created a lot of new money. And wouldn’t you know, by 2020, 2021, 2022, we had inflation. And there was a big argument: Is it transitory? It turned out to be not quite so transitory. And really, it’s still with us, I think, because the Fed—it’s gotten rates down, but it hasn’t gotten them down to 2%.
Jim Puplava:
If we take a look at this, I’m concerned about when do we get to a point where you see the bond vigilantes show up? We saw that in the ’70s when interest rates got all the way up to 15%. We saw it more recently in England with Liz Truss. She tried to cut taxes, the bond market revolted. Six weeks later, she was out of office. Could something like that realistically happen here?
Richard Sylla:
In the U.S.? Oh, I think it can happen, and it’s probably likely to happen. And I would say, you know, because—look, interest rates—people want to get a real return. Let’s say that my guess that we’ll have closer to 3% inflation going forward rather than 2% is the case. Then, if you want to get a 2% real return and you have 3% inflation, then I think you could justify, you know, Treasury bills being at around 5%, and, you know, the ten-year Treasury might be a bit above 5%, and the longer-term yield may be closer to 6%. Those are very common rates in past American history. I’m sort of amazed that you hear a lot of commentary now: “Well, when is the Fed going to cut rates?” You know, Wall Street seems to be begging the Fed to cut rates. And when the Fed looks like it won’t cut rates, Wall Street sort of adjusts. So I think the bond vigilantes are sitting there on the sidelines, and they’re ready to come back in if we settle down to a higher rate of inflation, which I expect. Now, I’d say there’s one further complication that’s just coming up now. The policies with increased tariffs are, I think, changing the U.S. position in the world. Whether we were sort of everybody’s friend—even people who didn’t like us very much pretended to be friendly—but now we’re doing unfriendly things to the rest of the world. And the complication I’m referring to is that the rest of the world holds a lot of U.S. Treasury debt, and the rest of the world buys U.S. Treasury debt. That’s one of the reasons why these huge deficits have not led to higher interest rates. So, in some sense, the rest of the world has been helping us finance these huge deficits. But now, with the U.S. adopting an unfriendly attitude toward the rest of the world, I just wonder: Are they going to keep holding the massive amounts of debt they do? Are they going to continue to buy our debt? I could see a lot of reasons why they won’t. And that is—you might say the bond vigilantes aren’t just the investors in our country. They’re investors all over the world, including foreign governments that may be holding U.S. debt as reserves. And so I think there’s a danger that they will stop buying our debt and maybe even sell back some of the debt to us. And that is sort of, you know, it’s a bit of the behavior of a bond vigilante.
Jim Puplava:
I just heard recently some people are putting out the theory that the Trump administration may renegotiate the debt with our foreign debt holders and force them to accept perpetual bonds, like a zero-coupon hundred-year bond. Do you think that’s plausible?
Richard Sylla:
I wouldn’t say it’s plausible, but I guess it is possible. I mean, I think, you know, one of the great things about our country is that we essentially have never defaulted on our debt from the time that Alexander Hamilton restructured it in 1790. You know, little things happened here and there that some people refer to as a default, or some people claim that leaving the gold standard back in the 1930s was a default of sorts. But you could make those arguments, but essentially, we’ve been a really great debtor over the course of our history—that we’ve honored our debt commitments. And that’s, I think, why the rest of the world actually holds a lot of our debt. I mean, it’s considered the safest of safe assets. A lot of finance theory sort of keys off the U.S. Treasury interest rates and says other bonds and stocks should be priced somewhat higher than our basic interest rate. And I’m thinking we’re in danger of losing that credit we had with the rest of the world for what—230, 235 years, I guess, from 1790 to now. And Trump likes to make deals, I think, in his own business life. He’s renegotiated a lot of his debts, and he may think that he can do that, but I think that that would be a terrible mistake. You know, you said, “Is it plausible?” Well, it’s possible, I would say, but I don’t think it’s in the national interest to damage our credit by such actions.
Jim Puplava:
What do we do? You know, the one advantage the U.S. has—we still have the largest economy in the world, and we have the largest financial market. So if you are China or another country, you’re doing business with the U.S., you have excess dollars, you have an outlet for investment of those excess dollars. You have our securities market—stocks, bonds, real estate. The second-largest economy in the world, China, has now become a manufacturing powerhouse. They don’t want people investing in their market. They have a lot of restrictions. So there’s talk about settlement in gold. So, in many ways, what can replace the dollar in terms of debt? Where do people go if, let’s say, they’re doing business with the U.S., if they don’t want to invest in our markets, where does that money go?
Richard Sylla:
Well, I think you put your finger on a problem that—yes, it is true that our markets are really huge. We’re only 4% of the world population, but I think recently our equity market has been like 60% of the total world equity market. And our bond markets are very big, deep too, relative to the rest of the world. So I think—I don’t think the dollar is in danger of losing its status as the primary world reserve currency. But there again, you know, the changes we’re seemingly making right now may threaten that. You know, maybe people will lose—if they lose confidence in our debt, they may lose confidence in the dollar. Right now, I think the dollar accounts for something like 60%, and I would expect that to go down with what’s going on now. So I think, you know, we’re flirting with dangerous—I would say dangerous—policies that may come back to haunt us. Presumably, though, as the markets give that message back to us, there’ll be adjustments in the policies.
Jim Puplava:
Suppose President Trump asked you to become his head economic adviser. Given the things that we just discussed—the debt, the deficit, interest rates, and the dollar—what would you advise him to do in the situation we find ourselves in today?
Richard Sylla:
Well, I think I would, you know, cut back on the tariff increases because I see them as, you know, changing the way foreigners look at us. You know, we were thought to be a reliable partner. But I think, you know, if actually I were advising Trump, I would say, “I think, Mr. President, you’re making a large mistake in terms of economic policy because you’re misinterpreting some data.” I think behind his feeling is we have this rather massive trade deficit. You know, we buy a lot more from foreign countries than they buy from us. And Trump’s tariffs supposedly are designed to make the trade deficit smaller. But I think what he doesn’t realize is that the trade deficit has been going on for quite a while now—for the last 40 years at least—and our economy hasn’t really suffered so much from that. And so what I would say is that—but those large financial markets that you referred to, and that we’re very proud of, you know, they’re really a big factor in the finances of the whole world, not just our country. Those markets are very attractive to foreign investors, and—but how can they invest in our markets if they don’t have the dollars to do it? And my view of the situation is that the trade deficit we have is more a result of foreigners wanting to accumulate dollars so they can reinvest their money in the United States. If we love our Magnificent Seven, and we love our Treasury—the liquidity of our huge Treasury debt market—foreigners like that too. And so I think that Trump doesn’t like the trade deficit, but I think the trade deficit may actually be the result of foreigners’ desires to invest in the United States, and we supply them with the dollars to do it. So if we use draconian measures to reduce our trade deficit, we’re cutting off the supply of dollars that foreigners might well invest in our economy. So I don’t know if I could teach President Trump that lesson, but that’s my view of it. And so I think, you know, he just looks at the trade deficit and doesn’t really understand the whole situation of what’s going on there. In fact, I would say the trade deficit is not the thing to focus on. I mean, he should be looking at the incentives foreigners have to invest in our country, which has helped us a lot in recent years.
Jim Puplava:
Well, if you take a look at—just since the election—the number of countries and companies that are reinvesting: Yesterday, Taiwan Semiconductor, they’re taking their investment in the U.S. to 160 billion. They’re going to build five plants. You’ve got Saudi Arabia with 600 billion. So they’re bringing—he’s bringing those investments here. So that, I guess, would be on the positive side. It’s just a question of how out of control this gets with the tariffs, because one day it’s going to be 10%, the next day it’s 25. And I think all that uncertainty is rattling the markets.
Richard Sylla:
Well, I would certainly agree with that. I think we’re seeing that now. And markets don’t, you know—there’s a lot of uncertainties to investing in normal times. If the politicians sort of add to that uncertainty by having the sort of policy shifts—tariffs up one day and down the next—that adds to the uncertainty. And so I think it’s not really great for the financial outlook. And I think we’re beginning to see that realization taking over in the minds of investors. So I really think that, you know, the investments that foreigners are saying they will make—you know, it’s not clear to me that they will follow through. It will depend on how the situation develops. I think there was, you know, in the first Trump administration, there was a lot of talk about some company making a big investment and building a big factory somewhere in the area of Milwaukee, Wisconsin. And I think that sort of fizzled out, and the investment wasn’t really made. So it’s one thing to promise to make investments, but I think the policies of our administration are creating lots of reasons for people to say, “Well, we were going to do that then, you know, thinking you might treat us a little better. But if you’re going to treat us the way you are, with higher tariffs and all that, we’ve changed our mind. We don’t want to make those investments.” So it’s nice to have them talk about making those investments, but talk is cheap. Making the investment is something that I think is much less certain.
Jim Puplava:
Well, as we look at this, we know that deficits are several trillion, the debt keeps growing, and we’re more likely in an upward cycle in interest rates. And it reminds me, Professor, when I got into the business at the beginning of the ’80s, we were coming out of the double-digit inflation of the ’70s, and the way we worked in bond portfolios, we had short-term maturities because you didn’t want to go long-term because you’d get hurt. It almost seems like that is going to be another strategy to use going forward. Because if I know that interest rates are going up, that inflation’s going up, I don’t know if I want to buy a ten-year or a twenty-year bond if I expect rates—
Richard Sylla:
To rise—I would say that’s exactly right. And of course, buying those longer bonds in the 1980s when rates were going down happened to be very good for investors. Some of the yields on long-term Treasury bonds in the 1980s were right up there with the returns on stocks. Paul Volcker was a friend of mine, and I once teased him a little bit by saying, “You’re the man who made a bond have the same yield as a stock.” And he laughed a little bit about that. But that, in fact, was the case in the 1980s. If you bought those bonds at 14 or 15% yields in 1980, ’81, by 1990, interest rates had come down a lot, and people had made double-digit returns on their bond investments. So that was a great time. Now, what you say—we’re doing—where we are right now, I think we’re just in the opposite. We’ve had very low interest rates instead of very high interest rates. And so I agree with you 100% that investing in a longer-term bond right now is a pretty risky thing to do. And I think, you know, a lot of people realize—and I think we see it already in the, you know, the yields aren’t very high right now, but the long-term Treasury has—it’s higher than almost all the short-term yields. And so I think we’re basically normalizing interest rates a little bit, and the level is likely to rise, as you say, which is a bad deal for bond investors. You know, it was a terrible thing to buy bonds in the 1940s and ’50s because as interest rates went up from then to 1980, the returns on bonds were terrible. And I think we’re maybe at the early stages of a similar situation where bond investments—long-term bond investments—are pretty risky right now. So yeah, I think it’s wisdom that if you have to have fixed-income investments, you should do it with fairly short maturities.
Jim Puplava:
I think investors in bond funds got a rude awakening because you don’t have a definite maturity in a bond fund. And that’s why we use individual bonds. It’s interesting that you talked about the 1980s. When I got in—the first ten years of my career in this business—all I did was bonds. I was getting 12, 13, 14% yields on Ginnie Maes. I mean, who in the heck wanted to go into stocks when you got double-digit returns guaranteed by the U.S. government?
Richard Sylla:
Exactly. That reminds me of a debate my wife and I had. She was a professor too. And I told her back in the late 1960s, when we got to be professors after our PhDs, that the finance theory told me that the best thing to do with our retirement money was to put it in equities because equities outperformed fixed income over longer terms. And we were talking about retirement money, and she did that. And then, of course, the 1970s weren’t very good for stocks. So when interest rates got really high in the—around 1980, when you first got into the business—my wife took some of her equity money and put it into bonds, and I kept my equity money, and she looked pretty smart for a couple of years. But then, you know, the stock market took off as well. And so, in the end, I think the stock market investors who held on—and, you know, we had a tremendous bull market there in the 1980s and ’90s—and so that rewarded stock investors. But yeah, I think it’s a hard thing when interest rates are very high, and people suffered a lot of losses. It’s a hard thing to put your money in there. Same thing with the stock market. For some reason, the psychology of investors is different from the psychology of consumers. I think when the stock market is falling, I say to my friends, “Wall Street is having a sale; you should buy some stock.” And they say, “Are you crazy? It’s going down! Get me out of there.” So why do we rush to Macy’s if they sell shirts at half price, but we don’t buy stocks when Wall Street sells them at half price?
Jim Puplava:
So, Professor, if we were to sum up right now, just from your perspective going forward, it looks like a rising interest rate market. I think we’ve begun a new secular bear market in bonds. And if you are going to be in bonds, you might want to be in individual bonds and keep them shorter-term or intermediate so you don’t run the risk if you have to get out of them at a loss. Would you agree with that?
Richard Sylla:
100%. I think you’re exactly right. That would be my advice to investors.
Jim Puplava:
All right. Well, I know A History of Interest Rates—it’s in the fourth edition. Any plans to update that, or is that the final copy?
Richard Sylla:
Well, it’s probably my final copy, but, you know, I signed on—Sidney Homer was the fellow who started it back in the ’60s, and he put out a couple of editions, and then he passed away. And I was asked to revise it and bring it up to date. And so I did that starting in the late 1980s and through that edition that you have there from 2004-2005. But I’m getting long in the tooth, you know, and so this is a job for a younger man. I’ve been asked about that. And my excuse in recent years was, “Well, gee, we’re having such an interesting interest rate history with rates getting down to sort of zero and even negative in some parts of the world.” I said, “This is not the time to bring out a new edition. I want to see how this all shakes out before I do a new edition.” So that was my excuse. But I think some of the shaking out has happened now. And I agree with you that we’re probably in a period where interest rates are going to rise secularly—not just this year or next month, but for some years ahead, maybe even a couple of decades. The question is, how high will that be? But I think another thought I’ve had is that there’s so much information available on the internet—which, when I first got involved in the project, there was no internet—we have to think about how our world has changed now. Many academic journals are going online; they’re not publishing paper copies anymore. So maybe we don’t need a book on the history of interest rates, but we need to have some kind of online updating which can be done. I mean, our technology has changed so much that I’m not sure a new book on the history of interest rates is as necessary as maybe having an online source that preserves the history and can be updated with great frequency, unlike editions of a book.
Jim Puplava:
Well, I still love this book, The History of Interest Rates. In my mind, it’s one of my favorite investment books, along with some of the books written by Ben Graham. Professor, I want to thank you for joining us on the program. It’s always a pleasure speaking with you. Be well, my friend.
Richard Sylla:
Thank you very much. I enjoyed our conversation, Jim.
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