Will rising interest rates threaten our incipient economic recovery?

SAN DIEGO, California – Consumers vote with their wallets and so do the markets. It is quite surprising to look at the bond market and interest rates today. In less than two months, from the beginning of January to the end of February, the 10-year Treasury yield had risen by an astonishing 54.9% percent, from 0.91% to 1.41%, after briefly reach 1.52% on February 28. Meanwhile, Treasury yields in other industrialized countries are much lower, including Germany, which has a negative return of -0.25% on its 10-year Treasury Bond.

While some economists argue that this seismic rise in US Treasury yields is caused by the improving economy, the strongest underlying factor appears to be the fear of upcoming inflation in the United States attributed to the current administration’s appetite for printing (borrowing) and spending money. , including an additional $ 2 trillion in a new economic stimulus package. This is on top of the money, which was loaned and injected into the economy in 2020 by the previous administration, including $ 1 trillion, which has yet to be spent.

As the late Senator Everett M. Dirksen used to say: “A billion here, a billion there, and very soon we are talking about real money.” Except we’re talking billions here. How much money is a trillion dollars? : $ 1,000,000,000,000 or one billion billion. All of our national debt in 2000 was only about $ 6 trillion, now it is over $ 27 trillion and is growing rapidly. Of course, higher interest rates also mean a higher cost of servicing our national debt.

To put things in perspective, our U.S. Gross Domestic Product (GDP), which is defined as the total market or monetary value of all finished goods and services produced within our borders, was approximately 20.9 trillion dollars in 2020. Our total annual federal tax revenue is approximately $ 3.5 trillion or about 16% of our GDP. So our national debt far exceeds our national income. Do we see a problem here?

Printing piles of fiat money as a long-term inexpensive “fix” never brings long-lasting good results. When in doubt, look to Venezuela. Once the richest country in Latin America, Venezuela is now one of the poorest, with inflation so high that its money is not worth the paper it is printed on. How bad is inflation there? A mere 2,685% in 2020.

For the average person, these types of numbers are so astronomical that they make little sense. But what do rising interest rates mean to us ordinary people? Certainly a higher cost of living, including higher mortgage rates (home loans, home equity lines of credit), affecting housing expenses, a higher cost of consumer credit (credit cards, auto loans), higher cost of student loans, and the list goes on. It will also lead to higher prices on everyday goods and services. Have you seen the gas prices lately?

The rising cost of credit will undoubtedly affect the housing market, putting downward pressure on its prices and affordability. The housing market is critical to the overall health of the economy, affecting many jobs, consumer spending, and our nation’s overall wealth.

It can be argued that the housing market should undergo a correction anyway, as price increases during the pandemic were both abrupt and unsustainable. That could be true, however higher interest rates will make this correction much more severe and lasting.

So just as we begin to see some signs of a nascent economic recovery, another presumably well-intentioned stimulus – or at least its sheer size and opportunity – can backfire and hurt. The focus should be on wisely using the “old” unspent stimulus money, which Congress already approved last year, keeping interest rates low and reopening the economy as vaccination efforts gain momentum and Covid infections and deaths. decrease.