Biden’s stimulus plan, inflation, and interest rates for 2021–2022

  1. The employment rate, which better captures the “slack” than the unemployment rate.
  2. Capacity utilization.
  1. The US economy will likely enter “overheat territory” some time in 2022 or 2023 and expectations will start pricing all that in before it actually happens.
  2. A positive output gap combined to the huge monetary expansion and the FORM of the stimulus package (most of which is payments to people and businesses, which is indeed equivalent to a “helicopter drop” of money) could theoretically bring inflation to dangerous levels, potentially as high as 8% to 10%, thus necessarily bringing bond yields upward and causing a huge interest rate shock to markets and the real economy.
  3. The bond market is estimating all that I am saying now and is starting to price in an inflation shock for that same period of 2022–2023, which is brewing up some tension for the Fed, as I wrote in my last text “Central Banks vs Bond Markets.”
  4. Corporate debt and government debt are sky-high, stock and real estate valuations are sky-high, so an inflation shock that brings an interest rate shock would be nothing less than a catastrophy of epic proportions that could severely destabilize markets, the real economy, and social order, both in the USA and worldwide.
Me climbing in climbing paradise: Cuba!

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Pascal Bedard

Pascal Bedard

Sharing thoughts on economics, finance, business, trading, and life lessons. Founder of www.PascalBedard.com