\n Bond investors know Washington can\u2019t solve the underlying inflation problem, and they\u2019re demanding a higher yield to compensate them for the growing risk that their investments will be devalued over time by rising prices.\n <\/p>\n
\n High bond yields are driving interest rates higher on consumer loans that are pegged to Treasuries, including mortgage rates. So, unless Washington is prepared to take serious action on prices (and there\u2019s no indication it is), get used to this new era of uncomfortably high inflation \u2013 and interest rates.\n <\/p>\n
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\n America\u2019s $31 trillion economy is too big and diversified for politics to break. But fiscal policy can help speed it up or slow it down.\n <\/p>\n
\n Right now, the White House and Congress are aligned: They\u2019re speeding it up. The One Big Beautiful Bill Act last year lowered taxes and increased spending. The war in Iran has also cost many billions of dollars.\n <\/p>\n
\n The consequences of some of those policies aren\u2019t all bad: Unemployment is low, the stock market is near record highs, home prices are rising, and consumer spending is up \u2013 particularly from wealthy Americans with mortgages and money in the market. Business spending is stronger than ever, particularly from the tech sector, which is spending $1 trillion this year on AI infrastructure.\n <\/p>\n
\n But they\u2019re not all good, either. Oil prices, tariffs and AI have boosted inflation<\/a> in the near term, but they\u2019re not the only causes: Price increases have been above the Federal Reserve\u2019s 2% target all decade. Uncomfortably high inflation is a sign that the economy may be overheating.\n <\/p>\n \n \u201cExpansionist fiscal policy when employment is full and prices are growing above trend is highly inappropriate,\u201d said Joe Brusuelas, chief economist at RSM US.\n <\/p>\n \n There are times when that kind of fiscal response is precisely the right thing to do. The US government acted in unison in 2020 and 2021 with unprecedented economic stimulus to get Americans back to work and compensate for global supply chain snarls during the Covid pandemic. That led to the highest inflation in 40 years \u2013 but it quickly brought down the highest unemployment rate since the Great Depression.\n <\/p>\n \n \u201cAs an economist, I\u2019ll take that tradeoff every day,\u201d said Brusuelas.\n <\/p>\n \n Politicians are often unwilling to do difficult things like cut spending or raise taxes, even in the best of times. But in recent years, we\u2019ve seen a rise of populist politics on both sides of the aisle that makes these possibilities appear even more distant.\n <\/p>\n \n The last time the government got its spending under control was in 1998, part of an effort led by former President Bill Clinton and Treasury Secretary Robert Rubin. The budget was balanced, which meant that \u2013 for the first time since 1969 \u2013 the government spent less money than it brought in. That reversed in 2001 because of a tax cut bill, and the government never looked back.\n <\/p>\n \n Perhaps most significantly, the Republican Party has largely abandoned even the veneer of interest in budget-cutting, especially in Trump\u2019s second term.\n <\/p>\n \n Trump has talked a big game about getting deficits under control. He pledged in 2016 to pay off the entire national debt in eight years \u2013 a completely unattainable goal \u2013 but instead continued to pile on debt at a rapid pace. He started his second term with a Department of Government Efficiency (DOGE) that saved a tiny fraction of its erstwhile chief Elon Musk\u2019s trillion-dollar goal. Its savings were\u202fvastly exaggerated<\/a>\u202fby the administration.\n <\/p>\n \n Since then, Trump and congressional Republicans passed an immigration and tax bill that the Congressional Budget Office has said will\u202fadd $4.7 trillion to the debt<\/a>\u202fover 10 years (while ignoring those numbers by using some\u202fcreative accounting<\/a>). And now the administration is proposing a massive \u202f40% increase in annual defense spending, to $1.5 trillion<\/a>.\n <\/p>\n \n Some Republicans have occasionally raised concerns about the costs of Trump\u2019s proposals. But Trump has demonstrated a talent for getting his party to go along with What Trump Wants.\n <\/p>\n \n So even as the national debt recently passed the $40 trillion landmark, there was barely a murmur coming from the party of fiscal responsibility.\n <\/p>\n \n While Trump sometimes joins Democrats in talking about taxes on the wealthy, he has shown little commitment to that. And Democrats would be very hard-pressed to ever get any GOP buy-in on that idea.\n <\/p>\n \n Fed Chairman Kevin Warsh has declared war on inflation, committing (at least verbally) to take tough action to get prices under control. That could include raising the Fed\u2019s rates, which can raise borrowing costs and slow down the economy.\n <\/p>\n \n The Fed\u2019s rate tool is blunt, and it can have unintended consequences, including slowing down hiring.\n <\/p>\n \n But the Fed can\u2019t act alone. Fiscal policy needs to align with the Fed, so politicians and the monetary policy setters aren\u2019t working against one another. Just ask former Fed chair Jerome Powell how he felt about Trump\u2019s tariff policy or Democrats\u2019 spending spree in the early part of the decade (he didn\u2019t seem to care much for either).\n <\/p>\n \n Right now, the main effect of the government\u2019s spending spree is the high cost of living and borrowing. But it could spiral out of control.\n <\/p>\n \n Let\u2019s be very clear: We\u2019re nowhere close to that. The economy and the financial sector are healthy. Markets are booming. Investors still crave dollars and the security of US Treasury bonds. Foreign governments and, increasingly, individual investors remain willing to lend to the United States.\n <\/p>\n \n However, if the expansionist fiscal policy goes on long enough, it could end up with a banking and a currency crisis, noted Brusuelas, the chief economist at RSM US.\n <\/p>\n \n \u201cAt some point, someone will have to swallow some very difficult medicine and hike taxes,\u201d Brusuelas said. \u201cWe know how this picture ends.\u201d\n <\/p>\n","protected":false},"excerpt":{"rendered":"High prices have turned Americans against the economy, and they\u2019re starting to unleash real consequences for Washington and…\n","protected":false},"author":2,"featured_media":589056,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[138,219,111,139,69],"class_list":["post-589055","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-business","tag-economy","tag-new-zealand","tag-newzealand","tag-nz"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/589055","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/comments?post=589055"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/589055\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/589056"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=589055"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=589055"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=589055"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"Vice](\"https:\/\/www.newsbeep.com\/nz\/wp-content\/uploads\/2026\/09\/c-gettyimages-1576119777.jpg\")
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