Interest Rates Are Rising

This may be the beginning of a steady slowdown in the economy: long term US government bond rates are rising with the ten year bond now topping 5.0%. The New York Times reports here: Cheap Money Fades as 10-Year Note Tops 5%

This may seem like a low interest rate, but the economy for the whole of the last decade has been built around low interest rates: we haven’t seen the ten year bond over 5.0% for a few years. One result of low rates was the real estate bubble that is now beginning to deflate. Rising rates will put more pressure on housing and could push what is now a stable price environment into a full scale retreat. That would cause all sorts of disruption across the economy, and is coming at a time when inflation seems to be picking up. This latter phenomenon would add fuel to the fire if the Federal Reserve Board has to push short term rates up to damp inflation.

I am not arguing that it’s time to panic, but the negative signs are accumulating: rising interest rates, declining property values, inflation increasing, stagnant wages and flattening profits. All in all a bad deal.

And because we have huge deficits already the administration has no room to use fiscal stimulus to offset the coming slowdown. Typically the Fed would cut rates and the government cut taxes to stimulate the economy and avoid a recession. With inflation rising the Fed can’t help us, and with deficits already out of control the government can’t either.

Plus we have a reckless foreign policy that adds uncertainty which will push interest rates up further.

The last few years have exposed us to the potential of a major recession. Bush’s policies have made the problem worse.

Maybe we’ll struggle through, but it won’t be because of anything Washington is doing.