Re: If the President succeeds, and I have no doubt he will, we can expect interest rates to be lower and economic statistics will be less reliable.
I'm not so sure...
The Fed controls short term rates. The Fed does not control long term rates. The Fed rate has some influence over the 2-year rate, minimal influence over the 10- and 30-. Those are determined by the market, by the willingness of individuals, institutions, and governments to commit to the dollar for the long term.
Right now we enjoy historically low spreads, just ~0.5% between the 2- and the 10-, and just ~1.0% between the 2- and the 30. If those spreads widen to the 1.0% and 2.0% respectively, similar to where they've been in the recent past, then long term rates can RISE at the same time that short term rates are falling.
fred.stlouisfed.org
Moreover, you mention stagflation and the 1970s. The 2-year yield was never lower than 5.3% during the 1970s, for the simple reason that people are reluctant to loan money at ANY term at a rate that is significantly lower than the rate of inflation. If inflation were to rise above 5% then you would necessarily see short term rates rise above 5%. Longer term rates are more sensitive to longer term inflation expectations, but if you saw an expectation of 5% inflation then you would see 10-year rates around 7%.
You also have to recognize that we are in a far more dangerous situation today than we were in the 1970s. The federal deficit in the 1970s was never greater than 4%. Today we are looking at ongoing deficits for the foreseeable future in the 6% to 8% range.
fred.stlouisfed.org
I cannot overstate how extremely dangerous that is. This isn't a temporary deficit from a recession and/or the response to a recession. This is a permanent structural deficit that will not and cannot resolve itself. The only possible resolution is structural changes to the major spending programs (Social Security, Medicare, Medicaid, Defense) and/or to the revenue stream. And it is very tough to increase revenue beyond a point - Federal receipts have never to my knowledge exceeded 20% of GDP.
fred.stlouisfed.org
Will also note that during the 1970s, the federal debt was never more than 36% of GDP. Today it stands at 120% of GDP and is scheduled to steadily increase. (There is no conceivable way that GDP growth will outpace the 6%++ deficits and thus the debt/GDP ratio will continue to increase - indefinitely - as long as the deficit continues at this level.)
fred.stlouisfed.org
I lived through the 1970s, even if I was young at the time. I saw what my parents (as young adults raising a family) went through, the challenges they faced. It was a tough decade. But we're setting up for something 10x worse than that. The solutions that got us through the 1970s are not guaranteed to be effective in the upcoming storm. |
