Subscriber Comment of the Day
rolf thrane
Peter Boockvar argues that inflation is stuck at 3%–4% and that there is little the Federal Reserve can do about it while the federal budget deficit remains at 7%–8% of GDP. I think he is wrong. Not about the the Fed, but about what the likely scenario that will play out is.
- A deficit of 7%–8% of GDP is clearly unsustainable—not necessarily because it guarantees persistent inflation, but because the economy cannot grow fast enough to stabilize the debt burden indefinitely. The ultimate consequence will be a substantially higher tax burden , potentially approaching Scandinavian levels, without necessarily receiving Scandinavian public services in return.
- Inflation alone does not explain the 10-year Treasury yield. Unless the market is materially raising its long-term inflation expectations—which I do not believe it is—the higher term yield reflects rising real rates embedded in the term premium. We may simply be returning to a more normal interest-rate regime: positive real yields, a meaningful term premium and an upward-sloping yield curve—the historical norm rather than the exception.
- Inflation of 3%–4% is consistent with the combination of deficit-financed demand, resilient aggregate spending and or lingering supply constraints. But none of those forces are permanent. Supply pressures should ease as wars and geopolitical disruptions eventually abate. At the same time, higher real rates should restrain demand, while a stagnant or declining workforce limits the economy’s long-term growth capacity. Real economic growth is not sustainable at 3 percent with a declining workforce and stagnant population- we have seen that in Europe for 2 decades and in Japan for more than 3 decades.
Position: None
