Markets

 The jobs report was unexpectedly strong yesterday. It wasn't historically good or anything close to it, but it was a solid report. As Krugman points out, the stock market - especially the NASDAQ - fell off quite a bit. Why would the stock market fall on a decent jobs report?

The answer is interest rates. Tech companies are highly dependent on debt and that's why the NASDAQ fell. Given that we have not entered a cratering job market BUT prices are continuing to rise because of Trump's Iran Misadventure, the Federal Reserve is not going to cut rates. This is the '70s oil shock dynamic, and if inflation becomes an expectation then you will have to see a Fed Recession to kill it. Not a good dynamic.

So, the Fed won't cut interest rates. Secondly, the budget deficits are growing so incredibly large that government borrowing is going to start squeezing out private borrowing, if it hasn't already. That will make interest rates rise, too. This cost of borrowing is going to bite everywhere: credit card interest rates, meeting payroll, mortgages, college loans...And as inflation heats up, people will need to borrow more simply to meet their living expenses. That will happen in a lending environment that will be quite tight.

The real question is whether a Fed increase will burst the AI bubble. Sure, some of those companies are likely in decent shape, but there are a LOT of AI start-ups, and they aren't making money, they are living off their perceived future value and operating off of borrowing. If that tanks, then we are possibly in the stagflation dynamic.