Recently, the Bureau of Labor announced something that had never happened before in America. At least, not in the time we have been keeping statistics, anyway.

In America, there were now more job openings than job seekers.

On the surface, that sounds great. In fact, at one level, it is very good news.  The Trump recovery is underway, after eight years of the Great Obama Depression.  After eight years of what was at best mismanagement and at worst, an absolute attempt to tank the American economy, this nation is roaring back.  Tax cuts, which have not really kicked in yet, help.  Even bigger for America are the cuts the Administration has made to the regulatory state.

Unfortunately, there is danger ahead.

In economic terms, right now there are too many jobs chasing too few workers. When that happens, there is competition for workers and wages go up.

Higher wages are a good thing, right?

Not necessarily.

This nation and its economists, have lived in fear of inflation since the dark days of the Carter administration.  During the Carter years, inflation rose as high as 13%.  The Federal Reserve stepped in and raised interest rates.  The high interest rates killed inflation but also killed economic growth as well.  Eventually, the Reagan tax cuts helped the economy recover.

Now, fast forward to today.

One of the earliest indicators of inflation is wage inflation. We have not seen much of that yet, but it is coming. And what does the Federal Reserve do when inflation rears its head?   They raise interest rates.

For the last decade, this nation has enjoyed abnormally low interest rates.  And the nation when on a borrowing rampage. The government borrowed money. Businesses borrowed money. People borrowed money.

In 2017, interest rates rose to their highest levels since 2009.

And there is the danger.

One of the issues that led to the launch of the Tea Party movement in 2009, was the unrestrained spending and borrowing by the Federal Government.  Borrowing has a cost and that is in the form of interest that is paid.

The government shows no sign that it is slowing down its spending habits, even as record tax revenues are coming in to the Treasury.

What happens when interest rates rise?

Here are a couple of dirty secrets. First, the government only pays the interest on the national debt. The actual debt itself is recycled by the issuance of new debt paper (treasury bills).  Second, most of those bills are short term bills.  In other words, money the government borrows today, it must borrow again, usually in ninety days.

What happens when the interest rates rise, dramatically?  What happens when we have a repeat of the Carter years and end up with a prime rate of 20.50 percent?

The answer is the government will have to spend a lot more money just to borrow money to remain solvent. Where will that money come from? Some of it will be borrowed. Some of it will have to come from either new taxes, which will strangle the economy. Or, it will have to come from reductions in other government programs.

Anyone remember Greece? They had the same problem.  They could not pay back their debt, could not raise taxes and various powerful constituent groups made it impossible to cut spending.

This kind of financial disaster is coming to America.

The first rain drops are falling.

The storm is coming.

Leave a Reply

Your email address will not be published. Required fields are marked *