Watch out. Prosperity ahead.

The American economy is poised for recovery.  

     "I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody."

           James Carville, as quoted by Bob Woodward, 1994

Watch out. Interest rates have moved up.

Americans are ready to reopen and get back to normal.

There is a lot of pent-up demand in the form of travel postponed, birthday and anniversary dinners cancelled, concerts not attended, business not done. COVID just inconvenienced some people. Others were financially demolished. There is political demand to do something to help the people most hurt. Democrats did something.

Bipartisan spending for COVID during Trump's presidency put money into the economy. It was supposed to find its way to people unemployed and underemployed in retail and hospitality jobs, and some did. It also found its way to prosperous people with stock and real estate assets that got more expensive.

Democrats just passed a $1.9 trillion spending package--more money to slosh around. A glorious economic theory emerged during the Trump years: Modern Monetary Theory. MMT means a country whose currency is the world's reserve can spend without real discipline, because the lucky country can pay the debt by creating money to pay it any time they want. MMT said we can grow our way out of the debt, or simply carry it on the books until it fades away into nothing.

Ten year treasury yields. Up.

Meanwhile, the vaccines are getting around, and ready-or-not people are starting to cut loose. Democrats are going tsk-tsk over the Texas decision to go back to normal now, and Biden called it Neanderthal thinking, but there is no big outrage nationally. Worried people protect themselves, and no longer expect others to do it for them. The young and unworried are burning their masks or wearing them below their chins.

Mark me as one of the worried. I wear a double mask in public, but I am more than ready to cut loose and reclaim my life, my freedom, as soon as I can. I can absolutely see the political appeal of the Texas policy even if I don't share it. I got my first shot last week. My wife got hers the week prior. The second shots are scheduled for each of us. It looks like we are going to make it through the pandemic. I want to celebrate.

It isn't just me. That deferred demand, combined with this second serving of money just voted on by Democrats, will create a glorious sugar-high of prosperity. It is a one-two punch of demand plus government policy.

All this is built on a premise: That the U.S. can simply carry the debt on the books and service it easily. 

The premise may not work out as expected. There are cross-currents in inflation pressures. Global trade; the competition from a billion new workers in Asia, South America, and Africa; automation; artificial intelligence; and the aging demographics of the developed world have combined to keep inflationary pressures down. Still, we see that food prices are up and so are oil prices. Energy costs may wind its way through the economy. Democrats are trying to get wages to rise. Republican officeholders say they will, and that it will destroy small businesses. Others say they will rise, and it will provide new customers for those small businesses. Yet others say wages won't rise, because we will see more and more self-service for store clerks and hospitality. No one knows.

But we do know that something has happened in the other half of the premise, interest rates. They are going up, and it isn't caused by Fed intention. Market participants are demanding higher rates of interest, with rates more than double from earlier this year. Servicing the debt was supposed to be easy, even free, because we were going to have interest rates below the rate of inflation, and presumably bond buyers wanted the safety of return of nominal principal more than they wanted a positive return.

As I write this the stock market is up sharply. The Democratic deal passed. Economists refer to "animal spirits" as the engine that moves the economy. People have ambition and take risks and create value. As this blog wrote yesterday, that speculative risk appetite is here in abundance, dangerously so, but it comes and goes. Risk appetite is present, until it isn't.

Higher interest rates are the classic wet blanket for animal spirits..