Monday, February 05, 2018

Inflation and Rising Interest Rates

After the events of 2008, as Congress passed the stimulus bill and the Obama administration took charge, conservative bloggers such as those at Powerline started to worry about inflation.  Liberals such as Kevin Drum and the liberal economists mocked the concerns.  I have to admit that while I mostly agreed with the liberals, my memory of the inflation of the 1970's caused occasional qualms.

Turns out the liberals, and Bernanke and Yellen were right--we didn't have inflation over the Obama years.  Interest rates remained low.

But, with today's news of the stock market fall, there's more discussion of inflation.  Maybe finally inflation will hit and pass the 2 percent a year benchmark the Fed has used.  I'm no economist and I'm not panicking about the stock market.  But I do want to point out something I've not seen mentioned.

The federal deficit is projected to rise very significantly this year.  Trump's tax cut will hit revenues, and even if he's correct it will stimulate the economy, any increase in revenues will take a while to show up.  But what if it doesn't?  And what if inflation is at the door, and the Fed raises rates faster than expected?  The net result of higher interest rates is greater budgetary pressure and a larger deficit.  (We know that from Clinton's early years.)  That's not a good formula.

(A parenthetical note: I've not seen the Powerline bloggers raise any concerns about the deficit since January 19, 2018.)

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