Tag: inflation

The Coming Demand Surge Brings Back Memories of 1970s Inflation

Mary Pat Campbell

Link: https://www.wsj.com/articles/the-coming-demand-surge-brings-back-memories-of-1970s-inflation-11616624489

Excerpt:

There are eerie parallels today. In 1973, the U.S. was coming off a two-year experiment in wage and price controls, which artificially depressed prices and muted signals that the economy was overheating. Then, too, the Fed pursued an easy-money policy, keeping interest rates low — though considerably higher than now, and without today’s purchases of bonds and mortgage securities.

By the end of 1972, before the inflationary jump, the U.S. economy seemed even stronger than it is now, growing at an annual rate of more than 8%. Unemployment was down to 3.4%, and inflation was a seemingly manageable 5.6%. The pre-pandemic 2020 U.S. economy was also very strong, growing at a 3% annual rate, with historically low unemployment of under 4% and inflation hovering around only 1%.

In 2021 we’re emerging from the pandemic shutdown, which cratered growth and slammed the economy — depressing price pressures, not unlike what the price-control program did 50 years ago. Today’s Fed policies are even more expansive. And Congress has just enacted a $1.9 trillion stimulus bill — on top of earlier relief bills costing another nearly $2 trillion, a lot of which remains unspent and will continue to fuel demand this year and beyond.

Author(s): William N. Walker

Publication Date: 24 March 2021

Publication Site: Wall Street Journal

Does the Fed’s Monetary Policy Threaten Inflation? (Contains Spoilers)

Mary Pat Campbell

Link: https://www.nationalreview.com/2021/03/does-the-feds-monetary-policy-threaten-inflation-contains-spoilers/

Excerpt:

Indeed, Brainard writes, “If, in the future, inflation rises immoderately or persistently above target, and there is evidence that longer-term inflation expectations are moving above our longer-run goal, I would not hesitate to act and believe we have the tools to carefully guide inflation down to target.” It matters that people believe this, even if the actions cause immense short-term pain. Do people still believe the Fed has that will? Do people believe that the Treasury Department and Congress have the parallel will to take fiscal steps to contain inflation if it should come?

Does the Fed really have the tools to do it? I am doubtful. For ten years, interest rates were zero. (Interest rates were either too high or too low, depending on your view of things, but stuck at zero in any case.) For ten years, the Fed ran massive quantitative easing after quantitative easing. Inflation just sailed along slightly below 2 percent. This episode suggests the Fed has a lot less power than it thinks. But that is also a cheery view, as if the Fed’s interest-rate and bond-purchase tools are relatively powerless, then not much of what the Fed is doing will cause inflation either. In the current economy, fiscal policy and fiscal anchoring seem the greater danger to inflation than even the monetary mistakes of the 1970s.

Author(s): John H. Cochrane

Publication Date: 9 March 2021

Publication Site: National Review

Too Many Smart People Are Being Too Dismissive of Inflation

Mary Pat Campbell

Link: https://www.nytimes.com/2021/03/05/opinion/fed-inflation-markets.html

Excerpt:

That assistance should also be more concentrated on where the need exists. According to Bloomberg, California’s revenues for this fiscal year are roughly 10 percent greater than expected (partly a result of soaring technology company valuations), while general-fund revenue in New York is estimated to be 11.7 percent lower than prepandemic forecasts.

And we should take a fine-toothed comb to lesser-known wasteful provisions, like giveaways to the airlines and an indirect bailout (added by the House) of multiemployer pension funds. Some of the money that we save by trimming the American Rescue Plan Act can be reallocated to one of our most pressing needs: infrastructure. Those funds get spent more slowly (and because of that put less immediate pressure on prices) and have the critical effect of helping to improve our unimpressive productivity growth rate.

Wasting precious dollars that could be better spent can’t possibly be worth the risk of igniting high inflation again.

Author(s): Steven Rattner

Publication Date: 5 March 2021

Publication Site: New York Times

EXPLAINER: Why rising rates are unsettling Wall Street

Mary Pat Campbell

Link: https://apnews.com/article/coronavirus-pandemic-financial-markets-stock-markets-inflation-prices-96e01a1db876bd4ad7e183e8cb4874e8

Excerpt:

WHY ARE INFLATION AND GROWTH EXPECTATIONS RISING?

Coronavirus vaccines will hopefully get economies humming this year, as people feel comfortable returning to shops, businesses reopen and workers get jobs again. The International Monetary Fund expects the global economy to grow 5.5% this year following last year’s 3.5% plunge.

A stronger economy often coincides with higher inflation, though it’s been generally trending downward for decades. Congress is also close to pumping another $1.9 trillion into the U.S. economy, which could further boost growth and inflation.

Author(s): STAN CHOE and ALEX VEIGA

Publication Date: 26 February 2021

Publication Site: Associated Press

Economy: Inflation Concerns Are Growing

Mary Pat Campbell

Link: https://cgfa.ilga.gov/Upload/0221revenue.pdf

Excerpt:

It has been over a year since the COVID-19
recession began in February of 2020. After going
through a brutal loss of 31.4% in the second quarter
and an immediate, rapid rebound of 33.4% in the
third quarter last year, the economy appears headed
for a recovery. Overall, the U.S. economy shrank by
3.5% in 2020, compared to 2019. This was the worst
growth since one year after World War II. In
January, personal income rose 10% and consumer
spending jumped by 2.4%, the biggest increase since
June of 2020, both of which mostly resulted from the
COVID-19 relief payments by Congress. Housing
markets are still robust, partly supported by low
mortgage rates.
However, the employment report in January showed
weaker-than-expected data. The unemployment rate
fell to 6.3% from 6.7% mostly due to a decrease in
the labor force (i.e. people gave up looking for jobs).
The economy gained 49,000 jobs, which was lower
than expected. Inflation, currently at 1.5%, is
persistently below the Fed’s average goal of 2%.
Having said that, the outlook on the U.S. economy
has improved as daily COVID-19 infection cases are
falling and more dosages of the vaccines are being
administered. In addition, $1.9 trillion is ready to be
pumped into the economy once a third COVID-19

relief bill passes Congress. However, the recovery
rate will not be as fast as the rate seen in the third
quarter of the previous year.

Author(s): Julie Bae

Publication Date: February 2021

Publication Site: Illinois Commission on Government Forecasting and Accountability

In Democrats’ progressive paradise, borrowing is free, spending pays for itself, and interest rates never rise

Mary Pat Campbell

Link: https://www.washingtonpost.com/business/2021/03/03/democrats-stimulus-spending-inflation/

Excerpt:

To hear it from liberal economists, progressive activists and Democratic politicians, there is no longer any limit to how much money government can borrow and spend and print.

In this new economy, we no longer have to worry that stock prices might climb so high, or companies take on so much debt, that a financial crisis might ensue. In this world without trade-offs, we can shut down the fossil fuel industry and transition to a zero-carbon economy without any risk to employment and economic growth. Nor is there any amount of infrastructure investment that could possibly exceed the capacity of the construction industry to absorb it.

Rest assured that the economy won’t miss a beat no matter how far or fast the minimum wage is raised. And whatever benefits are required by the always struggling middle class can be financed by raising taxes on big corporations and the undeserving rich.

Author(s): Steven Pearlstein

Publication Date: 3 March 2021

Publication Site: Washington Post

Resiliency vs. efficiency

Mary Pat Campbell

Link: https://tinyletter.com/acs171/letters/known-unknowns-43

Excerpt:

I expect some big institutional changes to be coming our way soon. One favorite debate, at least according to the editorial page of the Financial Times, is the trade-off between efficiency and resilience. Buying all your goods from China, including PPE, may be efficient—but if you have a global pandemic, then it means that you’re not so resilient. Or, if you live in Texas, cheap energy is great when you blast your air-conditioning every August when it’s 110 degrees outside, but if there’s a crazy cold snap and your power gets shut off, you see that your system is actually not that resilient at all.
 
We already see the Biden administration taking on resiliency, as he is trying to revive domestic manufacturing. And we can expect some soul searching in Texas as well. But I’m not convinced that we’ll get the big overhaul, because the problem with resiliency is that it can be extremely expensive, and once we forget about the shock, we don’t want to pay for it anymore. It’s expensive if you define resiliency as the ability to seamlessly handle a once-in-a-lifetime tail risk that you never saw coming. People like cheap power and goods, and those things help the economy grow.

Author(s): Allison Schrager

Publication Date: 1 March 2021

Publication Site: Known Unknowns

Fed Chairman Vows to Keep Supporting Economic Recovery

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2021/02/23/fed-chairman-vows-to-keep-supporting-economic-recovery/

Excerpt:

The Fed will continue $120 billion in monthly bond purchases and communicate any change.

Powell doesn’t expect any large and persistent increases in inflation; some pickup will be temporary.

Powell says getting the pandemic under control is needed for the economy to reopen.

Author(s): Bernice Napach

Publication Date: 23 February 2021

Publication Site: Think Advisor

Deficits Don’t Matter—Until They Do

Mary Pat Campbell

Link: https://www.city-journal.org/deficits-dont-matter-until-they-do

Excerpt:

The big misunderstanding here is that, though structural changes are certainly persistent and less responsive to policy, they are not permanent. Conditions are always changing. Productivity transforms economies, and so do shifting age structures and demographics. Foreigners are already losing their appetite for U.S. debt; much of it is now bought by the Fed or by banks required to hold it for regulatory reasons. Thus prices may not be as revealing as we think.

And we can’t be sure that debt monetization won’t unleash inflation or higher interest rates. The Fed buys bonds from the banks and credits them with reserves. Eventually banks may want to spend their reserves, and the Fed will need to sell some bonds—which could increase interest rates, or increase inflation, or both. The world could also discover a new safe asset, like German stocks. For many years, gold was considered the only safe asset, and it was unimaginable that a fiat currency could be safe.

Structural changes happen more often and much faster than people realize. We could come out of the pandemic in a new regime of less trade and more reliance on tech that could change debt and price dynamics in ways that we don’t yet understand.

Author(s): Allison Schrager

Publication Date: 12 February 2021

Publication Site: City Journal