The Good News, the Real Problem, and What We Can Do About It
Don't get me wrong. There are a lot of good things happening in the economy. But in my last few notes we have talked mostly about the symptoms: how to evaluate what is happening in the bond market, and how to be prepared for what the economic future could bring. This time I want to start with what is going right, and then turn to the causes, because the causes are what we can actually do something about.
What has gone right
The economy has kept growing through a war, an oil shock, and rising interest rates, which is no small thing. A few highlights from roughly the past 18 months:
No recession. The economy grew about 2 percent in 2025 and has grown every quarter of 2026. Second-quarter growth was revised up last month to 2.2 percent, well above what economists expected, and early estimates for the third quarter run above 3 percent.
Businesses and consumers are still spending. Spending by households and private businesses grew at a 4.2 percent annual rate in the second quarter. Corporate profits jumped by roughly $400 billion in that same quarter.
Jobs. Unemployment has stayed in the low-to-mid 4 percent range, close to what economists consider full employment, even as hiring has cooled.
A wave of business investment. Full expensing of equipment under last year's tax law, plus the build-out of AI data centers, chip plants, and power infrastructure, has driven the largest private investment push in a generation.
Record stock market. The S&P 500 set a record in August, and household retirement accounts benefited.
Record federal revenue. The government collected more tax revenue in the fiscal year just ended than ever before, even after the tax cuts.
Inflation had been beaten back. Before the Middle East conflict pushed oil higher, inflation had cooled to about 2.4 percent in January, close to the Federal Reserve's target.
The world still wants to lend to us. Last week's Treasury auctions drew strong demand, including from foreign buyers who many feared had walked away.
That is a real record of resilience. Which is exactly why the problem below is so frustrating: it is largely self-inflicted, and it is fixable.
What is driving interest rates up
The main cause: we spend more than we take in
The national debt passed $40 trillion in August. In the fiscal year that ended September 30, the government took in record revenue and still ran a deficit of roughly $2 trillion, because spending grew faster than revenue did. Interest on the debt alone approached $1 trillion, and that bill grows every time an old, low-rate bond is replaced by a new one at today's rates.
Every dollar of that shortfall has to be borrowed at the auctions we have been watching. The more the government needs to borrow, the more it has to pay to find willing lenders. That is the root of the problem, and it is not the doing of one party or one administration. Both parties have added to it for more than two decades, through tax cuts and spending increases alike, in good times and bad.
Other forces making it worse
The deficit is the foundation, but several other things are stacked on top of it right now:
The oil and energy shock. The conflict with Iran and the disruption in the Strait of Hormuz pushed oil above $90 and diesel to a record. Higher inflation means lenders demand higher interest to protect themselves, and it forced the Federal Reserve to raise rates in September instead of cutting them.
Fewer foreign buyers. Japan, our largest foreign lender, has been selling U.S. bonds to defend its own currency and is now earning more at home. China's holdings are at their lowest since 2008. When the traditional buyers step back, the rest of the market must be paid more to fill the gap.
Competition for the same savings. Large technology companies are borrowing hundreds of billions of dollars to build AI data centers, often selling long-term bonds to the same pension funds and insurers the Treasury relies on.
Rising rates around the world. Britain and Japan are also paying their highest long-term rates in decades. In past crises, money fled to safety in one country while another struggled. Today there are fewer safe places to hide, which pushes rates up everywhere.
Lost tariff revenue. After the Supreme Court's February ruling, the government began refunding tens of billions in tariffs, which widened the deficit this year.
Doubts about the Fed's independence. Public pressure on the Federal Reserve to cut rates while inflation is above target makes some investors worry that inflation will be tolerated later, so they demand a higher rate today as insurance.
Some of these will pass. A settlement in the Middle East would ease oil prices, or just more oil, and the tariff refunds are a one-time hit. The deficit will not pass on its own. It is the one cause that is entirely within our own control.
What we can do about it
The solution is simple to state and hard to do: the federal government has to live within a budget, and then run a surplus to start paying down the debt. In my view, that means everything has to be on the table, including entitlement programs, defense, and the rest of the budget. It should be whatever it takes.
Congress will not do that unless voters make it clear they expect it. Here is what each of us can do:
Contact your two U.S. senators and your House representative. You can find them at house.gov and senate.gov. A short, personal letter or phone call to their local office carries more weight than a form email. Ask them to commit to a balanced budget on a stated timeline.
Ask candidates a direct question before the November 3 election. Not "do you support fiscal responsibility," which everyone says yes to, but "what specifically would you cut or change to balance the budget?" If they can't name anything specific, that tells you if they take the problem seriously
Ask for specific reforms, not slogans. Ideas with support from both parties include a bipartisan fiscal commission whose recommendations get an up-or-down vote, enforceable pay-as-you-go rules so new spending or tax cuts must be offset, passing budgets on time instead of governing by stopgap, and showing the interest cost of every major bill.
Write to the White House. The Administration proposes the budget, and the Office of Management and Budget sets its tone. Comments can be sent through whitehouse.gov.
Support the watchdogs. Nonpartisan groups like the Committee for a Responsible Federal Budget, the Peter G. Peterson Foundation, the Concord Coalition, and the Bipartisan Policy Center track spending and publish plain-language analysis. Following them is the easiest way to know what is actually being proposed.
Talk about it. Share this note, raise it at your Rotary or chamber of commerce, write a letter to the local paper. Elected officials notice when an issue moves from Washington into the community.
Lead by example at home and in business. Keep your own borrowing in check while rates are high. It protects you, and it keeps you in a position to act when others cannot.
The bottom line
The American economy is stronger than the headlines about bond yields might suggest. That strength is exactly what gives us room to fix the one problem we created ourselves. Higher interest rates are the symptom. Spending more than we take in, year after year, is the cause. Neither the bond market nor the Federal Reserve can fix that. Only Congress can, and only if we ask.
Scott C Turner CPA
This note is general information and reflects publicly reported economic data as of the date above, along with my personal views on fiscal policy. It is not investment, legal, or financial planning advice. Please consult a licensed financial advisor before making investment decisions.
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