The People Funding America Are Getting Nervous

Well, the bond vigilantes are back…

And they’re clearly none-too-pleased with Kevin Warsh’s Federal Reserve.

Last week, the new poohbah of American Money & Co. voted to hold US interest rates unchanged. Three of his compadres voted against him—they wanted to raise rates—but enough members of the Fed’s Open Market Committee voted with Warsh, so interest rates stayed put.

It was at this point that the vigilantes appeared from out of nowhere, much like the dead seamen who manifest out of the wooden hull of The Flying Dutchman in Pirates of the Caribbean: At World’s End.

And like those ghostly seamen, the vigilantes were angry they’d been disturbed.

They promptly dumped US Treasury bonds and sent yields on 30-year government debt to their highest level since 2007. Rates on the 10-year note jumped higher too.

That was the vigilantes sending a message: “We’re tired of your antics. Inflation is far worse than you’re letting on. And just remember, Kev-O, that we have the power to ruin your day.”

That’s not an exaggeration.

James Carville, the Clinton-era political strategist, once quipped that he wanted to come back in another life as the bond market, because the bond market can intimidate anybody.

The bond market is more powerful than any central bank, any president, any government. If global bond investors are displeased and see reason to worry about getting repaid, they let the world know unequivocally of the problems they see.

And that’s exactly what last week’s bond market moves were all about.

Bond investors see persistent inflation worsening.

They see US debt worsening.

And they peeked into Kevin Warsh’s toolbox and realized it’s packed with nothing but thoughts and prayers at this point.

The Fed is in a bad spot.

Warsh likes to talk all big and bad about wrangling inflation back to the Fed’s 2% target. After the Fed meeting last week, he said that he and the Federalistas have “no tolerance for persistently elevated inflation.”

Great.

But guess what?

America has nearly $40 trillion in debt. It’s paying more than $1 trillion a year in interest costs, now the largest line item outside of Social Security (Related sidebar comment: British-American economic historian Sir Niall Ferguson formulated Ferguson’s Law in 2025, holding that “Any great power that spends more on debt servicing than on defense risks ceasing to be a great power.” That’s America as of 2024, and there are historical precedents going back to the Ottoman Empire.)

Raise interest rates because you, the Fed, won’t tolerate inflation and you send the US into the kind of debt death-spiral that Ferguson’s Law warns about.

Cut rates to deal with a flailing economy and you give more fuel to inflation. And, yes, the economy is weak, despite the cheerleader pep-rally jabber: consumer distress is rampant, economic growth is decelerating, the jobs market is structurally weak, housing is in a recession, and corporate bankruptcies are above 2010 levels now because interest rates at just 3.5% are killing them.

Like I said… Kev-O has thoughts and prayers and not much else. And the bond vigilantes recognize this.

Pushing rates higher means that they’re demanding greater reward for taking on the increased risk they see in American debt. 

Basically, America isn’t a safe bet.

They want a larger payment for risking their money on Uncle Sam.

Now—why should you care?

Because what the vigilantes do reaches all the way into your kitchen.

Your mortgage does not follow the Fed. It follows 10-year rates—the one the vigilantes just pushed up. Which is why, even though the Fed “held rates steady,” rates on the average 30-year mortgage actually ticked higher after the meeting.

Life in America continues to get more expensive even when the Fed does nothing.

So where does this go?

These are the three risks I see that the market isn’t yet pricing in:

One: Uncle Sam’s borrowing costs keep ratcheting higher as debt rolls over and the interest rates that the bond market demands keep climbing. That’s the ouroboros eating its tail, and it leads to uncontrolled debt and a dollar crisis.

Two: Big Wall Street players have borrowed enormous sums of money hoping for huge payoffs on tiny bets. But if the financial pipes clog, the safest assets in all of finance—US government bonds—could suddenly crash. And the only firefighter is the Fed, printing hundreds of billions of dollars to put it out. Which means even greater inflation.

Three: For your entire life, when the world got scared, everyone ran toward America and bought our dollars and our bonds. The truly scary day is the one where they run away—selling our bonds and our dollars because of the risks they see unfolding.

Last week offered a hint at what that means.

The bond market said “Nope, we’re not playing your game anymore.”

There’s far greater risk in that than most people recognize.

I’ve been saying for a few years now that a crisis lands in America in the 2027-28 timeframe. We’re not there yet, but ask yourself this: When the people who lend money to America stop believing in America’s ability to pay its bills, what exactly is your plan?