Goldman: Something strange is happening with the US economy that could cause interest rates to jump

[mfcorey1]

America's budget deficit and unemployment rate are heading in opposite directions — something that's never happened during post World War II peacetime and could cause a significant jump in interest rates.

Goldman Sachs projects, for instance, that the 10-year Treasury note could be yielding 3.6 percent next year.

The deficit increase is coming due to the recent barrage of fiscal stimulus from Congress, including a $1.5 trillion tax cut approved in December 2017 and a $1.3 trillion spending bill aimed at keeping the government operating through the end of the fiscal year.

Normally such moves would come as in the early stages of an economic recovery. The U.S. economy, though, is in the eighth year of its post-financial crisis expansion, middling as it has been.

The unemployment rate is now at 3.9 percent and falling, while the budget deficit was at $668 billion in 2017 and is expected, according to the Congressional Budget Office, to top $1 trillion by 2020. That's a dual phenomenon that is highly uncommon in the U.S., according to Goldman economists.

The chart below shows that the only time since World War II that the deficit has risen while unemployment has fallen was during the Korean and Vietnam wars. An expanding economy normally would help drive down the deficit, but that hasn't been the case as government borrowing continues to grow.

https://www.msn.com/en-us/money/savingandinvesting/goldman-something-strange-is-happening-with-the-us-economy-that-could-cause-interest-rates-to-jump/ar-AAxgPHJ?li=BBnb7Kz&ocid=mailsignout

[Turbineguy]

1. There's probably a point where this becomes a problem.

Balance is lost. It's kind of like parasites. An economy can support only so many.

[DetlefK]

2. If interest rates go up, investment goes down and the economy will slow down.

But don't worry: After Trump there will be democratic President whose job it will be to clean up Trump's mess while the GOP sabotages him at every turn.

[Yavin4]

4. And said Dem president won't have the ability to address major structural

problems as well. This is how Republicans win even when they lose.

[wiggs]

6. That's right. I sat in on a session run by a financial advisor...and he said that the US

has lost the ability to raise interest rates significantly to slow the economy...because doing so with our debt level could lead to crash of all markets. Worst case scenario.

So they can't do it. Not sure what happens when they need to raise rates but can't. Inflation for wages and goods but low interest rates?

[BeyondGeography]

5. Which is why we can't play nice next time

And shouldn’t have even tried last time.

[DetlefK]

7. And we all know what republican talking-points will be wehen a Democrat becomes President:

"Phew, those Trump-years were so divisive and partisan! What our country needs now is healing! Which is why we need more bipartisanship and the Democrats should be nice to Republicans."

[BeyondGeography]

8. A return to civility!

It worked so well with our Republican friends from 2009-2017...

[strangedaysindeed]

3. Exactly

Lather. Rinse. Repeat.

[Roland99]

9. That would stifle home ownership and refis. Would cause interest on debt to rise

Another Great Recession

[unblock]

10. I'm surprised these are so in phase.

High unemployment causes increased deficits (more spending on automatic benefits and less income tax receipts) and increased deficits cause lower unemployment (tax cuts and spending stimulus), so I expect them to be correlated.

But I would have expected to see more timing differences.

Anyway, we already knew the most recent tax cut was economically idiotic. It was don't wholly for corrupt purposes, there was zero economic rationale.

More sensible would have been a revenue-neutral restoration of tax progressivity, or maybe slightly on the revenue-raising side.