The Curse of Understanding Finance

As I write, the bond market is throwing an unrequited hissy fit about the execrable budget negotiations surrouding the big, unlovely bill. In the world of finance, people are very worried about this. This is bad. The bond market is not an abstraction. Finance people know that if interest rates vault high enough, mortgage rates will go up correspondingly, but worse, the U.S. government will effectively be insolvent, and then, as a consequence, the central bank will be compelled to cap interest rates by buying an unlimited amount of government bonds, which will lead to hyperinflation, and everyone will die.

Person on the street: what’s a bond?

I think if an astronomer told you that an asteroid was going to hit earth and plop in the middle of your hometown, you would probably pack up the dogs and cats and drive across creation to the other side of the country. I think if a doctor told you that your drinking was unsustainable and you might die of cirrhosis of the liver, you might stop drinking, or you might not out of sheer ennui, but you would probably not disbelieve the doctor. If an architect told you that by building a big, gross addition on your house, you would destabilize the existing structure and it all might collapse, you would probably abandon the idea and spend the money on something else.

But if a financier tells you that spending more and lowering taxes will result in financial armageddon, you’re like ¯\_(ツ)_/¯.

All of us who work in finance are cursed, at least, the people who have read and understood financial history are cursed. We have seen this movie before, and we know what is going to happen next. And therefore, by knowing what is going to happen next, we are filled with a sense of existential dread. We hope we are dead by the time that financial armageddon actually takes place. But at the same time, we are also blessed in that we can take prophylactic measures. We know how to protect ourselves. When everyone else gets poor, we will get rich, or at least, not poor.

It’s not simply a matter of math. Yes, bonds have a lot of math. You can understand it if you have taken calculus, but not that many people have taken calculus, and most of those that have were asleep for it. There are about 750,000 people wtih math degrees in the United States (I am one of them), and let’s assume for a moment that everyone else is innumerate. That is about 0.25% of the population. But here is the thing: the astronomer who tells you that an asteroid is going to crash into earth is also using math, and you believe that fucking guy. But you don’t believe the guy who is telling you that it is practically a tautology that increased deficits will cause interest rates to go up. Perhaps that is becuase for a decade, in the 2010s, it wasn’t true. Perhaps it is because people think like sharpshooter Dick Cheney, that “Deficits don’t matter—Reagan proved that.” Perhaps people believe that the deficit is an abstraction, and they can’t see how it has any impact whatsoever on their daily lives. Perhaps people have been hollering about deficits for so long, and there have been no consequences to date. Perhaps all of these things. How many people in this country know how a bond auction works? Less than 10,000? I doubt that most of Congress knows how a bond auction works. Perhaps none of them do.

This is also known as financial illiteracy. You’ve probably heard that we are now teaching personal finance in schools. Great. How about teaching how a bond auction works? Javier Milei knows how a bond auction works. Maybe the next time we elect a president, we make sure they know how a bond auction works. We had a bond auction yesterday, and it was shit, and it tanked the stock market. Still, zero curiosity about how a bond auction works or why it is important. Zero introspection about what it might mean if we one day have a failed auction. Everyone just goes around whistling zip-a-dee-doo-dah out their asshole, blithely unaware as to how close to the precipice we actually are. I will admit—I was fooled. I thought that Trump and his representatives had small government instincts this time. I thought that DOGE would succeed. Apparently, nothing stops this train. I was at a neighbor’s house the other night explaining how all this stuff works. I’m not sure what was getting through. People have a tough time with convexity and reflexivity.

It would be easy and convenient to call people dumb. I am fond of saying that people are smart, that they are capable of understanding this stuff if you explain it to them. There hasn’t been a politician alive since Bob Rubin who has been able to explain the relationship between deficits and interest rates. Pierre Poilievre was a great explainer, but he lost the election, because Trump is a fool and fucked everything up. And still, less than 50% of people believed Pierre. I am Facebook friends with some Canadian Liberals who shit all over Pierre in my Facebook feed, calling him a racist, and worse. I think some people really don’t want to know the answer—they want to remain ignorant of the financial forces that shape our lives. Let me put on my Morpheus pince-nez glasses for a moment—What if I told you that mortgage rates are already abourt 2% higher than where they should be, becuase public borrowing is crowding out private borrowing. You could have a mortgage for 5.5%, were it not for all the pornographic spending. Of course, all of this is conjecture and ultimately unprovable, which is why Joe Shlabotnik doesn’t believe traders or economists. But again, it is a tautology. The government borrows first, and you’re second in line. This could be a long discussion about the parlous state of the profession of economics, a science which is not really a science, where sometimes things are true and sometimes they aren’t, sometimes things matter, and sometimes things don’t matter until they matter. Unlike an asteroid, which really is going to land on your house.

I just looked up how many copies When Money Dies sold. Perplexity choked on it. Probably no more than 100,000, and probably far less. This means that we have a lot of people who are undereducated as to what happens when you start monetizing the debt. The usual caveats apply here. We are not all gonna die in 2025. We might not all die in 2035, either. And maybe some president, somewhere, like a chainsaw-wielding madman will rescue us, deus ex machina-style from our own immolation. But if that doesn’t happen, yeah, we’re all gonna die at some point. And markets will do what markets will do, and bonds will probably rally for a bit and take the pressure off, and we won’t have to deal with this again until next year or later. But it’s checkmate, we’re all fucked, and nobody gets it.