Inflation is a drug and Washington is high on it

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High prices have turned Americans against the economy, and they’re starting to unleash real consequences for Washington and the financial markets.

Historic inflation led voters to oust Democrats from the White House in the 2024 election. Persistent high prices and a return of inflation have given President Donald Trump low approval ratings, and it’s threatening to turn Congress Democratic in November’s midterm elections.

So you’d think America’s politicians would do everything in their power to get prices under control. Yet they keep doing the exact opposite.

The one thing that seems to unite the left and the right nowadays is populist economics. But those policies that fuel inflation – including massive spending and tariffs – are very hard habits to kick. And on the opposite side of the same coin, the solutions to inflation – spending reductions and higher taxes – are massively unpopular and could hurt the economy in the short run.

That’s part of the reason why the bond market is in turmoil , with Treasury yields surging in recent months and, in particular, over the past couple weeks.

Bond investors know Washington can’t solve the underlying inflation problem, and they’re demanding a higher yield to compensate them for the growing risk that their investments will be devalued over time by rising prices.

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’s no indication it is), get used to this new era of uncomfortably high inflation – and interest rates.

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America’s $31 trillion economy is too big and diversified for politics to break. But fiscal policy can help speed it up or slow it down.

Right now, the White House and Congress are aligned: They’re 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.

The consequences of some of those policies aren’t all bad: Unemployment is low, the stock market is near record highs, home prices are rising, and consumer spending is up – 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.

But they’re not all good, either. Oil prices, tariffs and AI have boosted inflation in the near term, but they’re not the only causes: Price increases have been above the Federal Reserve’s 2% target all decade. Uncomfortably high inflation is a sign that the economy may be overheating.

“Expansionist fiscal policy when employment is full and prices are growing above trend is highly inappropriate,” said Joe Brusuelas, chief economist at RSM US.

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 – but it quickly brought down the highest unemployment rate since the Great Depression.

“As an economist, I’ll take that tradeoff every day,” said Brusuelas.

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’ve seen a rise of populist politics on both sides of the aisle that makes these possibilities appear even more distant.

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 – for the first time since 1969 – 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.

Perhaps most significantly, the Republican Party has largely abandoned even the veneer of interest in budget-cutting, especially in Trump’s second term.

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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 – a completely unattainable goal – 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’s trillion-dollar goal. Its savings were vastly exaggerated by the administration.

Since then, Trump and congressional Republicans passed an immigration and tax bill that the Congressional Budget Office has said will add $4.7 trillion to the debt over 10 years (while ignoring those numbers by using some creative accounting ). And now the administration is proposing a massive 40% increase in annual defense spending, to $1.5 trillion .

Some Republicans have occasionally raised concerns about the costs of Trump’s proposals. But Trump has demonstrated a talent for getting his party to go along with What Trump Wants.

So even as the national debt recently passed the $40 trillion landmark, there was barely a murmur coming from the party of fiscal responsibility.

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.

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’s rates, which can raise borrowing costs and slow down the economy.

The Fed’s rate tool is blunt, and it can have unintended consequences, including slowing down hiring.

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But the Fed can’t act alone. Fiscal policy needs to align with the Fed, so politicians and the monetary policy setters aren’t working against one another. Just ask former Fed chair Jerome Powell how he felt about Trump’s tariff policy or Democrats’ spending spree in the early part of the decade (he didn’t seem to care much for either).

Right now, the main effect of the government’s spending spree is the high cost of living and borrowing. But it could spiral out of control.

Let’s be very clear: We’re 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.

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.

“At some point, someone will have to swallow some very difficult medicine and hike taxes,” Brusuelas said. “We know how this picture ends.”

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高物价让美国民众对经济感到不满，并且开始对华盛顿和金融市场产生真正的后果。

历史性的通货膨胀导致选民在2024年大选中将民主党人赶出白宫。持续的高物价和通货膨胀的卷土重来使唐纳德·特朗普总统的支持率持续低迷，并有可能在11月的中期选举中使国会转为民主党控制。

所以你可能会认为美国政客会竭尽全力控制物价。然而，他们却一直在做着恰恰相反的事情。

如今，民粹主义经济学似乎成了左右两派的共同点。然而，那些助长通货膨胀的政策——包括大规模支出和关税——却很难摆脱。另一方面，应对通货膨胀的方案——削减开支和提高税收——却极不受欢迎，而且短期内可能会损害经济。

这也是债券市场动荡的部分原因，近几个月来，尤其是过去几周，美国国债收益率飙升。

债券投资者知道华盛顿无法解决根本的通胀问题，他们要求更高的收益率，以补偿他们因物价上涨而导致投资贬值的风险日益增加。

高债券收益率推高了与国债挂钩的消费贷款利率，包括抵押贷款利率。因此，除非华盛顿准备采取切实措施控制物价（目前没有任何迹象表明他们会这样做），否则就得习惯这种高通胀和高利率的新时代。

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美国31万亿美元的经济规模庞大且多元化，政治力量难以撼动。但财政政策可以加速或减缓其经济增长。

目前，白宫和国会立场一致：他们正在加快进程。去年的《一项宏伟法案》降低了税收并增加了支出。伊朗战争也耗资数十亿美元。

这些政策的后果并非全是坏事：失业率低，股市接近历史高位，房价上涨，消费支出增加——尤其是那些背负房贷且在股市有投资的富裕美国人的支出。企业支出也空前强劲，尤其是科技行业，该行业今年在人工智能基础设施方面的支出高达1万亿美元。

但这些因素也并非全是好事。油价上涨、关税和人工智能在短期内推高了通胀，但这并非唯一原因：过去十年，物价涨幅一直高于美联储2%的目标。过高的通胀率表明经济可能过热。

RSM US首席经济学家乔·布鲁苏拉斯表示：“在就业充分且物价上涨高于趋势水平的情况下，扩张性财政政策是极其不合适的。”

有些时候，采取这种财政应对措施恰恰是正确的。2020年和2021年，美国政府齐心协力推出了前所未有的经济刺激计划，旨在帮助美国人重返工作岗位，并弥补新冠疫情期间全球供应链的瘫痪。这导致了40年来最高的通货膨胀率，但也迅速降低了自大萧条以来最高的失业率。

“作为一名经济学家，我每天都会做出这样的权衡，”布鲁苏拉斯说。

即使在最好的情况下，政客们也往往不愿做削减开支或提高税收等棘手的事情。但近年来，两党民粹主义政治的兴起，使得这些可能性显得更加遥远。

上一次政府有效控制支出是在1998年，这得益于前总统比尔·克林顿和财政部长罗伯特·鲁宾的领导。当时的预算实现了平衡，这意味着自1969年以来，政府支出首次低于收入。然而，由于2001年的一项减税法案，这种情况发生了逆转，此后政府便再也没有回到之前的财政状况。

或许最重要的是，共和党已经基本放弃了对削减预算的兴趣，尤其是在特朗普的第二个任期内。

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特朗普曾大谈特谈控制赤字。2016年，他承诺在八年内还清所有国债——这完全是不可能实现的目标——但实际上，债务却继续以惊人的速度增长。他第二个任期伊始，成立了政府效率部（DOGE），但该部门节省的开支仅占其前任负责人埃隆·马斯克提出的万亿美元目标的一小部分。而且，政府还大大夸大了节省的开支。

此后，特朗普和国会共和党人通过了一项移民和税收法案，国会预算办公室称该法案将在未来10年内使债务增加4.7万亿美元（但他们却通过一些巧妙的会计手段忽略了这些数字）。而现在，本届政府又提议将年度国防开支大幅增加40%，达到1.5万亿美元。

一些共和党人偶尔会对特朗普提案的成本表示担忧。但特朗普展现出了让党内人士接受他意愿的才能。

因此，即使国家债务最近突破了 40 万亿美元的大关，但这个标榜财政责任的政党却几乎没有发出任何声音。

虽然特朗普有时会和民主党人一起谈论对富人征税，但他对此几乎没有表现出任何诚意。而且，民主党人也很难让共和党人接受这个想法。

美联储主席凯文·沃什已向通胀宣战，并（至少口头上）承诺采取强硬措施控制物价。这可能包括提高美联储利率，但这会推高借贷成本并减缓经济增长。

美联储的利率工具过于简单粗暴，可能会产生意想不到的后果，包括减缓招聘速度。

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但美联储不能单打独斗。财政政策需要与美联储保持一致，这样政客和货币政策制定者才不会互相掣肘。不妨问问美联储前主席杰罗姆·鲍威尔，他对特朗普的关税政策或民主党在本世纪初的支出狂潮有何看法（他似乎对这两项政策都不太感冒）。

目前，政府大肆支出的主要影响是生活成本和借贷成本居高不下。但这种情况可能会失控。

必须明确一点：我们离那个目标还很远。经济和金融业运行良好。市场一片繁荣。投资者仍然渴望美元和美国国债的安全性。外国政府以及越来越多的个人投资者仍然愿意向美国提供贷款。

RSM US 的首席经济学家布鲁苏拉斯指出，然而，如果扩张性财政政策持续足够长的时间，最终可能会导致银行业和货币危机。

布鲁苏拉斯说：“迟早会有人不得不吞下苦药，提高税收。我们都知道最终结果会是什么。”