WELCOME BACK, CARTER: Inflation Is the Issue That Will Topple the Democrats.

The bond market’s measure of expected inflation – the difference between the yield of ordinary Treasuries and the yield of inflation-indexed Treasuries – jumped to 2.82% after the CPI announcement. That’s a hair below the all-time high for this measure of inflation expectations in March 2005.

The Federal Reserve continues to pump trillions of dollars of liquidity into the US economy by purchasing US Treasury securities, financing most of the US budget deficit, now running at a peacetime record of 15% of gross domestic product (GDP).

That leaves the Fed painted into a corner. If it raises interest rates to suppress inflation, the cost of financing the deficit will rise drastically. If it does nothing, eventually the market will force interest rates up, with the same effect.

Federal payments now make up 34% of all personal spending in the US, an all-time record. Ultimately the Treasury will have to cut back, leading to a sharp reduction in spending and an economic recession.

Mister, we could use a man like Paul Volcker again.