Thursday, July 25, 2024

Will there ever be too much stimulus?


The short term, from an economic standpoint, looks really good. Vaccines are here, lockdowns are ending, American manufacturing is enjoying it's best run in decades, consumers are spending lots of money, and we're still creating lots of new jobs. However, even if the economy does begin to slow, we've become so comfortable writing big checks that any slowdown will likely be met with yet another gigantic stimulus bill - problem solved!

But it just can't be THAT easy, can it? My biggest worry, and I'm far from alone in this, is the risk of inflation and rising interest rates. The world had a lot of debt even before the 2008 financial crisis and the pandemic, but now we have a LOT more. The natural thing that happens as you rack up more and more debt is that the lender charges you a higher interest rate. We've been able to escape that fate because the Fed has kept rates so low. However, the Fed can only keep interest rates low because inflation has been so low. But that might be changing.

Recent reports have shown a strong uptick in inflation. That's not surprising given the trillions of dollars we recently injected into the economy combined with a lot of pent-up demand from the pandemic. The big question is whether it will continue. In recent years, we've had several short bursts of higher inflation, but they didn't last... If this one does, the markets will have to adjust to that reality - and it may not be pretty.

If we do start to see real inflation, interest rates will have to rise, which means all that debt we've accrued over the last 15 years becomes much harder to deal with, which probably means bankruptcies - and now you have a big economic problem. Even worse, it's not a problem we can solve by borrowing a lot more money. So, I hope we can avoid that fate.  


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