I have tried to make this point repeatedly because it is apparent that even many conservatives do not understand the impossible hole we are in financially and economically. For two decades Republicans and Democrats have acted like there was no limit to the amount of spending we could do, regardless of revenue adequacy, and that we could issue debt forever to accomodate that reckless spending. Dem theorists, and they are really good at theorizing, especially creating whacko ones that make no sense in the real world, have even come up with a theory to justify that called Modern Monetary Theory. After the last two years no one thinks that “theory” makes any sense, because it predicted we could just keep spending and there would be no inflation, no interest rate hikes, no bad consequences of any type.
Meanwhile, in the real world, we have to borrow money to pay the interest on our existing debt. No one wants our debt, even at much higher interest rates. Today there was a routine auction of ten-year notes, not an exceptionally large amount and there was very low participation in the auction. To get people to take the notes, the interest rate had to go up. This isn’t just about inflation on goods and services driven by increases in the money supply. This is about excessive spending driving the need for huge debt issuance, which someone has to buy and no one wants to unless the interest rates are much higher, both to compensate for inflation, but more importantly, because US debt is increasingly and appropriately seen as risky.
There is a point of no return and we are there. The reduction in spending required to get our fiscal house in order just so we can begin to reduce debt issuance is going to be phenomenally painful. Everything will have to be cut. Interest expense is becoming a huge part of the budget, and as interest rates rise and debt increases and old debt has to be refinanced, that interest expense will explode. You can try to inflate your way out of the mess, increasing revenue as incomes rise just by inflation, and making the nominal level of debt appear lower, but that doesn’t actually work, especially when everything is indexed and government spending rises due to inflation as well. And the inflation and interest rate mess has real economy consequences–people stop investing, spending, creating businesses and jobs. That reduces federal revenue.
So my prediction is that we have dug such a deep hole that inflation and high interest rates are not going away, no matter what the Federal Reserve does. The real economy is already in a recession, layoffs have just begun, the phony job numbers of the past few months will be massively revised to the negative and Congress and the Administration will continue to be in denial and in such conflict that nothing is done that actually might address it. Like cutting social spending and energy subsidies and all the other progressive fantasies that do nothing to improve people’s lives by hundreds of billions of dollars. Like removing regulatory barriers to economic growth and cheaper energy.
So things are going into a miserable hole and they will stay there. If you think the Presidementia is unpopular now, wait a few months. When it is apparent that nothing is or can be done to address the underlying cause of inflation and slow growth, I wonder if people will think abortion or “protecting” democracy or other trivial issues are more important that sound economic and financial policies.