Those of us who lived through the inflation of the 1970s will recognize the symptoms today. Prices that creep up. Politicians who grasp for ways to control rising prices that infuriate their voters.
Today’s inflation rate of 3% is much lower than the inflation of the 1970s. But inflation has a way of slipping out of control.
Running Hot
by John Mauldin, Thoughts from the Frontline, November 14, 2025
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The US government’s spending is (for now) directed not toward AI infrastructure but to defense, public works, healthcare, and assorted entitlement programs. This money flows through the economy and sustains large parts of it. And $2 trillion of it is borrowed money, which introduces a whole new dynamic.
That $2 trillion represents roughly 7% of GDP. It is a stimulus just as much as quantitative easing would be…
“Fiscal dominance,” is a situation where monetary policy is directed toward helping the government pay its bills…
“However, the reality is that fiscal dominance is becoming unavoidable. The US is approaching a point where rate suppression will be the only option, even if it means tolerating higher inflation.
“Even without interest payments, the US is still running a deficit of around 4% of GDP — an extraordinary imbalance. Cutting rates may buy time, but unless spending is reined in, the fiscal math only gets worse. … [end quote]
Inflation is the result of demand growing faster than supply. Monetary stimulus results in asset price inflation (stocks, bonds, real estate) if the lower interest rates mostly increase the purchasing power of investors rather than consumers. Fiscal stimulus, which flows directly to consumers, is the most direct cause of consumer price inflation.
Pollsters are finding that the landslide of Democratic Party victories a couple of weeks ago was mostly rooted in voters’ resentment of inflation and the increasing cost of daily living which they are blaming on the party in power.
https://www.wsj.com/economy/consumers/trump-cost-of-living-prices-8e08798d?mod=hp_lead_pos1
White House Hunts for Ways to Lower the Cost of Living
Aside from reducing tariffs, Trump has a limited ability to bring down prices
By Alex Leary, Tarini Parti and Justin Lahart, The Wall Street Journal
A proposal to give Americans direct payments of $2,000 or more. An antitrust probe into allegations that meatpacking companies are colluding to drive up beef prices. And a new plan to lower tariffs on coffee, fruit and other popular products.
President Trump and his advisers are rushing to try to lower prices for U.S. consumers after voters sent a warning shot to Republicans this month over the high cost of living…
Interest rates are set by the independent Federal Reserve, which has so far resisted Trump’s pressure campaign. The president would need congressional approval to issue direct payments to Americans.
Reducing tariffs is one of Trump’s most potent tools for lowering prices. On Friday, the administration said it would lower tariffs on beef, coffee, nuts, spices and dozens of other agricultural and food goods, marking a significant shift in Trump’s forceful approach to trade policy…
Other prices could be harder to bring under control. Housing costs, for example, are high in large part as a result of a shortage of available homes, but alleviating that can’t be done quickly. Oil prices are already near their lowest levels in over four years, but electricity costs are on the rise as surging demand from data centers confronts an aging infrastructure… [end quote]
The fastest way to increase inflation is to shower helicopter money onto consumers like the Covid bonuses in 2020 and 2021. I’m gobsmacked that Trump didn’t learn that lesson. In any case, Congress probably learned the lesson and won’t do that boneheaded plan.
Meanwhile, the idea of price controls, which have failed so many times (including in the 1970s), got socialist Mayor Mamdani elected in NYC. Here’s an editorial in the N.Y. Times that discusses price controls favorably. The authors note that economists hate price controls which predictably lead to shortages. But they still think price controls have a place.
The Bureau of Labor Statistics was shut down along with the rest of the government so there aren’t any fresh inflation statistics. But anyone who shops for groceries will know that food prices are spiking.
The bond market’s 10 year inflation expectation has been rock-steady at 2.3% since 2022. I think this is overly optimistic.
The imbalances in the economy will build up over time. At the moment the Federal Reserve is not practicing fiscal dominance. The Fed controls the overnight fed funds rate but they have stabilized their huge book of long-term bonds after gradually paring it back. The bond market is finally free at long last. Since bond prices move inversely to interest rates, existing bonds become more valuable when interest rates fall.
There’s no guarantee that long-term bond rates will fall if the fed funds rate falls. If bond investors anticipate rising inflation they will push up the yield of long-term bonds. Same if they anticipate growing government deficits where Treasury debt rises faster than investor’s willingness to buy it.
https://www.wsj.com/finance/bonds-are-heading-for-the-best-year-since-2020-02c5738b?mod=hp_lead_pos2
Bonds Are Heading for the Best Year Since 2020 Federal Reserve rate cuts overwhelm deficit fears, boosting Treasurys and corporate debtBy Krystal Hur and Sam Goldfarb, The Wall Street Journal
Almost everything has lined up for bonds lately.
The Federal Reserve has been cutting interest rates. Jobs growth and consumer spending are slowing, keeping hopes for further cuts alive, but not pointing to an imminent recession that would threaten corporate balance sheets. Inflation pressure has continued to moderate, despite fears that President Trump’s tariffs will drive prices higher…
While yields on government and corporate bonds have gradually come down, they are still far above the paltry levels seen during much of the past decade—and investors want to lock them in while they can. …
Treasury Secretary Scott Bessent has said that keeping yields low on longer-term Treasurys was a priority for the administration. They act as a benchmark for borrowing costs for everything from mortgages to student loans. … Some analysts warn that the U.S. government’s budget deficit is likely to weigh on the bond market again… [end quote]
The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, shows that financial conditions continue to be extremely loose.
A steady stream of articles describing the AI bubble business conditions (vast spending, minimal revenues) has unsettled the stock market, especially the NASDAQ. It’s too early to tell when the bubble will pop.
The Fear & Greed Index is in Extreme Fear. The trade is no longer risk-on but it’s too early to tell whether the trend has reversed.
The USD has been stable since its drop of over 10% beginning in early 2025. Gold, silver, copper, oil and natgas are all trending upward. Bitcoin continues its dramatic fall.
The METAR for next week is cloudy. There is plenty of noise but it’s too early to say whether the upward trends have been reversed.
Wendy
