The next U.S. recession could be a rough one, according to Harvard economist Martin Feldstein. The argument is that the Federal Reserve will continue to raise short term interest but very gradually, not leaving itself a lot of room to lower them when a recession hits. At the same time, due to the pro-cyclical tax cuts, the government will not be able to increase deficit spending by a lot because it will not be able to afford the increased interest payments. And third, low unemployment seems to be causing inflation.

It would not be surprising if the rate on ten-year Treasury bonds rises to 5% or more over the next few years. With an inflation rate of 3%, the real yield will be back to a normal historic level of over 2%.

This normalization of the ten-year interest rate could cause the P/E ratio to return to its historical benchmark. A decline of that magnitude, from its current level of 40% above the historic average, would cause household wealth to shrink by about $8 trillion. The historic relationship between household wealth and consumer spending implies that the annual level of household consumption would decline by about 1.5% of GDP. That fall in household demand, and the induced decline in business investment, would push the US economy into recession.

If you have an enormous nest egg, a 2% real return on bonds doesn’t sound all that terrible. For the rest of us relying on stocks to help us build that nest egg (those of us lucky enough to have a little extra income to save, that is), this doesn’t seem like good news.