The country and markets must worry about inflation, about recession, and the burden of financing the federal debt, which is held by the public, writes James Rogan. Put simply, tough times lay ahead.
Economic history teaches that embedded wage inflation is worse than a short sharp recession. When wage inflation is entrenched, workers, rightly or wrongly, believe that inflation is outpacing wages. Workers don’t like to be paid less. In addition, when inflation is well established, capital is allocated poorly. National prosperity suffers. Unfortunately, monetary policy affects the economy with a long lag, often a year or longer. So, the Federal Reserve is in a hard place.
The country and markets must worry about inflation, about recession, and the burden of financing the federal debt, which is held by the public. Publicly held debt is almost equal to 100% of the GDP. Therefore, each 1% increase in borrowing costs for the U.S. Treasury raises federal government demands on national capital by 1% of the GDP. Since the Federal Reserve began to tighten monetary policy, the interest rate on the two-year Treasury lending note has increased from 1% to about 4.4%.
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