Will Biden Overheat The Economy And Gold?

Under the Biden administration, the economy could overheat, thereby increasing inflation and the price of gold.

In January, Biden unveiled his plan for stimulating the economy, which is struggling as the epidemic in the U.S. continues to unfold. Pundits welcomed the bold proposal of spending almost $2 trillion. Some expenditures, especially on vaccines and healthcare, sound pretty reasonable. However, $1.9 trillion is a lot of money! And a lot of federal debt, as the stimulus would be debt-funded!

So, there is a risk that Biden’s package would overheat the economy and increase inflation. Surprisingly, even some mainstream economists who support deficit spending, notice this possibility. For instance, former Treasury Secretary Larry Summers said that Biden’s stimulus could lead the economy to overheat and that the conventional wisdom is underestimating the risks of hitting capacity. Although he doesn’t oppose the idea of another stimulus, Summers noted that “if we get Covid behind us, we will have an economy that is on fire”.

Indeed, this is a real possibility for good reasons. First, the proposed package would not only be large in absolute terms (the nominal amount), but also relative to the GDP. According to The Economist, Biden’s proposal is worth about nine percent of pre-crisis GDP, nearly twice the size of Obama’s aid package in the aftermath of the Great Recession.

And the stimulus is also large relative to the likely shortfall in the aggregate demand. I’m referring here to the fact that the winter wave of the coronavirus would be less harmful for the economy – and that there have already been big economic stimuli added last year, including a $900 billion package passed no earlier than in December.

Oh yes, politicians were really spendthrift in 2020, and – without counting the aid passed in December – they injected into the economy almost $3 trillion, or about 14 percent of pre-crisis GDP, much more than the decline in the aggregate demand. In other words, the policymakers added to the economy more money that was destroyed by the pandemic.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it ...

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Erikas Ivan 1 week ago Member's comment

Thank you for your detailed analyses, Arkadiusz! All I know is that Trump was very positive for gold in his term, for Biden, it remains to be seen!