In the late 1930's a British economist, John Maynard Keynes, revolutionized government's role in economics.
Today, virtually the entire world follows his beliefs. Keynes proposed that when government spending exceeded taxes, it would create extra demand for good and services in the country that could mitigate short-term economic boon or bust cycles. This is taking supply and demand to the government level from the particular level of a single produce. "Macro" economics, it is called.
In times of high unemployment and/or a stagnant economy, deficit spending will increase the country's demand for goods and services and therefore employees. Keynes would predict unemployment will go down.
One need look no further than WWII to realize how this worked in the US. As men went to war and the demand for war material skyrocketed, women were employed in what was previously a men-only club.
Deficit spending through the Obama administration no doubt had an impact on bringing unemployment rates down to the level that is now considered full employment. This means that everyone looking for a job can find one, or employers have trouble finding employees.
What happens if companies have more demand and can't get more employees to make the products their customers demand? They either raise their consumer prices to maximize their profits, or they raise their wages to attract more workers. The result of these increased prices is called inflation.
How does this relate to today?
- We are at full employment
- We already have record deficits
- The Republican tax bill increase deficits by 1.5-2.0 trillion dollars
- Republicans are calling for massive defense spending increases
- Republicans are calling for large infrastructure spending.
- The White House is proposing import tariffs and has started a trade war.
- The President wants a very expensive wall that we will pay for.
Now, we have the smart people who help manage our economy looking at the price of goods and services and noting the pressures put on them by the factors mentioned above and we see interest rates getting raised. Not to mention that the federal government's reputation in its ability to repay the debt we already have is currently being harmed by Republicans. This situation will inevitably cause an increase in interest rates for two reasons: 1)intentional to slow the economy down and 2)Unintentional because less people want to loan the US money.
There are two very significant impacts of this increase in interest rates:
- First, the housing market and car sales will be negatively impacted. This is good as it relates to inflation as it will cause less people to be able to afford new cars or houses. Demand for those will decrease, and so will prices.
- Second, investors will buy more bonds and sell stocks because the return on the bonds will be higher due to the increased interest rates.
Now do you see why there is some nervousness in the stock market and economy in general?
