There is no simple answer to the possible evolution of economic growth, interest rates, and inflation.
What seems to be clear, however, is that the present trend of accelerating national debt cannot continue forever. But, as every asset bubble in history proves, it CAN continue for quite awhile.
We have seen a bull market built on a number of simultaneous forces:
1) Demographics. The Baby Boomers are in their peak productive years. That is a HUGE resource of well-eductaed, free-thinking workers.
2) Technological revolution. Computers are revolutionizing everything. The world is changing MORE rapidly than it did during any of the previous technological revolutions in human history (agriculture, printing, industrial). Those took, respectively, millenia, centuries, and decades to affect the course of human history, and were separated by the same blocks of time. Computers brought the rate down to years, and now, a few YEARS later, the internet has brough it down to days.
3) The fall of communist and totalitarian systems. This has created millions of people with economic wants, and without the economic or societal infrastructure to produce them. That has created the paradox of increased consumer demand with simulaneous capital flight.
4) Secular bear market in commodities. This is due, in part, to some of the previous forces, technology, ingenuity of workers, need for cash in cash-starved economies.
5) Stagnant economies in much of the rest of the industrialized world. For many reasons, much of the industrial world's economy has stagnated. Part may be demographic, regulatory, and cultural differences. Whatever the cause, this has created an enormous capital flight to the U.S.
So, we have a combination of forces, some domestic and some international, that has lured capital, again both domestic and foreign, in to our equity markets.
The bottom line is that stock market equity and foreign bond holders are financing our current accounts deficits. Foreign money will continue to do that as long as it is in the best interest of the investors to do so.
And that requires that:
1) Foreign, and especially the industrialized countries', economies (and hence their equity markets) remain stagnant;
2) Our economy, and especially our currency, remain strong; and
3) Our equity and bond markets remain strong.
The bottom line is that our equity and bond markets are simply FREE MARKETS, governed in large part by the laws of supply and demand. So long as foreign money is willing to service our debt, then the present trend can continue.
But if Japanese, European, or Russian economies come roaring out of the dark, then there will be increasing competition for that investment capital, and European, Arab, Japanese, and Hong Kong investors, among others, may not find a 6.2% return on U.S. dollars particularly appealing.
That, and only that, is what is driving our bond market down now. And if that trend continues, or accelerates, then what the Fed does is meaningless. The Fed can piss whatever interest rate they like in to the wind, but if no one steps up to buy the 30-year long bond at the treasury auction, then interest rates will rise.
And while the magnitude of that increase, and its effect on inflation and economic growth, are hard to quantify, the DIRECTION of the effect is crystal clear.