Inflation is much worse this time

The last time we had inflation at these levels was the late 1970s. But, for the government ( meaning all of us ), it is much worse now.

Back then, Paul Volker hiked the lending rate to reduce demand Which lowered inflation. After a couple years of recession caused by higher rates, inflation was under control and the economy rebounded.

When Volcker hiked interest rates in 1980, the total amount of U.S. government debt was only $907 billion, or about 30 percent the size of the total U.S. economy. Today, the U.S. debt stands at $28 trillion, or about 125 percent of the total U.S. economy, meaning that our debt is worth about 25 percent more than our economic output each year.

The government has to pay interest on all this debt it has accumulated. As interest rates rise, the cost of paying that debt also rises. Which increases the size of the annual deficit. Which increases our debt. And so on. It’s a death spiral and we may be beyond a point where it can be stopped.

The total gross interest costs to the U.S. government were basically flat in recent years as the Fed held rates near zero, hovering at about $550 billion. That figure will hit $1.2 trillion within the next 18 months, which will amount to more than the government spends on either the Department of Defense or Medicare.

This means that the Fed’s tightening will push the United States closer to a dilemma that cheap debt has allowed it to avoid for years. The government will have to either raise taxes or cut spending to avoid more and more of its budget to simply paying interest costs.

Raising taxes would put a drag on the economy at a time when we are already entering a recession.

Cutting government spending is unlikely with the current politicians ( Republican and Democrat ) in office. They are in bed with all the groups that benefit from government largesse.