In a crisis, excessive federal deficits and money printing are necessary evils, as long as they are temporary. In 2020, Congress and President Donald Trump borrowed to spend about $ 3.3 trillion to increase family incomes, boost unemployment benefits, and support businesses, but most of the new Treasuries were not bought by investors. private.
The Fed printed money to buy $ 2.4 trillion in Treasury securities. Along with purchases of municipal, corporate and mortgage-backed securities, those purchases increased their balance sheet by $ 3.2 trillion. The $ 900 billion stimulus package authorized in the last days of the Trump administration, the additional $ 1.9 trillion proposed by Biden, and his other priorities such as a multi-year infrastructure program and the expansion of the Health Care Act At Low Price, they will require even more debt and money printing. up Very little of the new debt or money will be backed by new productive assets or a larger economy. Real gross domestic product will not recover to pre-pandemic levels long before early 2022. Many capital assets (empty office buildings, airplanes, and the like) will not be needed again for several years and have a lower intrinsic value now than before the pandemic. Economists will tell you that more money chasing a fixed amount of goods should cause more inflation, but the CPI rose only 1.4% last year. In 2020, we were hardly at risk for two reasons. We were nowhere near full employment, and workers and businesses were often reluctant to demand substantially higher wages and prices. And much of the Fed’s newly printed money was not circulating in the markets for real goods and services. If they weren’t among the unemployed or inactive by COVID, consumers used much of their stimulus payments to shore up their savings and pay off debt. Households have wide planning horizons and like to spread unexpected income spending over many months. Companies withdrew as closures slowed sales and those who saw increases were unsure of the shape and size of post-pandemic demand. Disruption Crises such as wars and natural disasters across the country tend to disrupt ingrained family and business habits to accelerate the adoption of new technologies, products, and ways of doing things – in this case, work from home, ghost kitchens, Pelotons, streaming services, and the like. But how much remains to be seen. Assets such as shopping malls and downtown offices will be reused and considerable sums will go to the new green economy. Electric vehicles will require factories that make internal combustion engines to be replaced by those that make electric motors and batteries. Armies of coders will replace many auto assembly workers, and Tesla TSLA, -0.77% could displace Ford F, + 1.31% or Chrysler FCA, -2.29%. As money pours into the new economy, empty storefronts, restaurants and office buildings, and store clerks, bartenders, and construction engineers laid off, in cities with high taxes and utilities Mediocre, like Manhattan, Chicago and Seattle, can be downsizing. Construction and manufacturing elsewhere face an acute shortage of workers, chips and microprocessors, and prices for these and basic raw materials such as aluminum, iron ore, copper and cotton are rising. inflation jolted, but lessons from the oil shocks of the 1970s indicate that tight supply tends to trigger self-perpetuating cycles of inflation as price pressures spread through labor markets and of goods in general. Paul Volcker, who took command of the Fed in 1979, controlled inflation by raising interest rates and unemployment. The sum of the inflation rate and the unemployment rate became Ronald Reagan’s misery index and cost Jimmy Carter a second term. Now it could get just as bad. During the pandemic, troubled municipalities and corporations with already low credit ratings feasted on cheap debt to keep going. If the Fed withdraws its stimulus policies as the economy accelerates later this year, poorly managed cities may not find buyers for their bonds at the interest rates they can afford. And investors may conclude that Ford’s F-150 or Chrysler Ram franchise should be sold and one of its parent companies, similar to Craftsmen and Sears tools, should be disbanded. The Fed has indicated that it will tolerate inflation above 2% to reduce unemployment to an acceptable level, but political pressure on Biden to curb inflation is likely to increase and Powell’s term ends in February 2022. Peter Morici is an economist and Professor Emeritus of Business at the University of Maryland, and a national columnist. More on Inflation Concerns about inflation have returned. This is what to worry about and what not to worry about. Axel Weber: Inflation could creep back, with devastating consequences Fed officials are not concerned about rising inflation, meeting minutes show