Wall Street Trumped-up Conviction Rally Sets Up Stagflation
The stock market rallied 600 points on Wall Street’s expectation that the political conviction of former President Trump will cause interest rates and commodity prices to crash as American families fearing chaos in the streets slash consumer spending.
This “bad is good” investor strategy has worked for four decades, because the U.S. Federal Reserve Bank pushed interest rates down during every recession. But Pres. Biden’s massive borrowing and spending binge during and after the pandemic means the Federal Reserve will be afraid that cutting interest rates will cause stagflation.
America’s last dance with stagflation began in the 1970s and peaked on May 31, 1983, with 9.7% unemployment and U.S. Treasury bonds yielding a record 14%. Economists blame the misery suffered by average Americans on President Johnson’s “Guns and Butter” deficit spending on both the Vietnam War and Great Society social programs.
The California Prop 13 tax rebellion in 1978 created the populist momentum that swept Ronald Reagan into the White House on a promise to “starve the beast” with tax and spending cuts. The tough love plan worked, and U.S. budget remained close to being balanced for the next 25 years. But as revealed by the chart below, U.S. Presidents since 2009 have run hundreds of billions of dollars of deficits every year.
Congressional Budget Office estimates that without a recession and 3% inflation:
U.S. deficit will be $1.8 trillion in 2025, and grow steadily to $2.6 trillion in 2034. In relationship to GDP, the deficit will rise from 6.1 percent in 2025 and 8% in 2034.
Interest cost on the U.S. debt is also estimated to rise from $951 billion in 2025 to $1.6 trillion in 2034; or about $12.4 trillion for the decade.
$17 trillion in short-term Treasury bonds issued during the pandemic at less than 1% interest rates, must be rolled-over in the next three years with current rates at 4-5%.
Adding these three categories together means that the deficit spending plus the interest cost on the U.S. Treasury debt will more than double to about 12% of GDP by 2034. At that point, deficit spending and the interest on the debt will be the largest category of the U.S. budget, and more than triple military spending as the next largest category.
The Federal Reserve was already warning that the U.S. might enter a recession in late 2024. They know the Trump convictions, continuing lawfare, and November elections are sure to hurt the economy and drive up unemployment.
But the debt and interest payments numbers are so large, and the crisis is growing so fast that the U.S. Federal Reserve will have to push interest rates higher to prevent the chaos from causing a credit crisis, U.S. dollar crash, and runaway inflation.