E Inflation Fears Relating To $1.9 Trillion Stimulus Are Exaggerated

Board, Blackboard, Economy, Inflation, Money

 

“The significant fiscal stimulus in the United States, along with faster vaccination, could boost US GDP growth by over 3 percentage points this year, with welcome demand spillovers in key trading partners.” (OECD, March 2021)

“Financial markets are signaling that they expect a return to underperformance once the Biden boom is behind us. These days interest rates are, in effect, a barometer of economic optimism — and these rates have in fact risen as the rescue plan has moved toward the finish line. But the rise has been modest, comparable to the “taper tantrum” of 2013 and minor compared with some interest rate surges of the 1990s.” (Paul Krugman, NYT, March 9, 2021)

There is little doubt that the US economic outlook is brightening, and that unwarranted fears of inflation are also coming back. 

However, the bottom line is that a sustained increase in US inflation is unlikely because the economy is expected to operate substantially below potential for a number of years.

Renewed economic growth optimism is based on the apparently successful rollout of a series of coronavirus vaccines and on the unprecedented amount of fiscal stimulus ($1.9 trillion or about 8½% of GDP) provided by the Biden Administration.

As well, there is also the massive amount of monetary stimulation provided by the Federal Reserve System, with promises that money will be incredibly easy well into 2023. 

One of the clear consequences of all of this is that the US economy is expected to project the appearance of very steep growth rates this year and into 2022. But this is rebound growth, not quite the kind of growth associated with a normal recovery.

However, the expectation of rapid rebound growth over the next couple of years has become the accepted consensus among economic forecasters. I will comment on two sets of US economic projections - the CBO’s and the OECD’s. 

1 2 3
View single page >> |
How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.
William K. 2 weeks ago Member's comment

Well written and interesting. What I see is that while the inflation will benefit the financial sector, who can all magically adjust their incomes to compensate for the loss of purchasing power, it doe not benefit at all the much larger segment who lack that wonderful ability. Thus the net effect is injuring the majority of folks, and really, doing that damage quite intentionally.

Norman Mogil 2 weeks ago Contributor's comment

Arthur an excellent analysis of why inflation will be more like a spike in prices rather than a sustained increase in the price level. Yet I've never seen such a groundswell of opinion that is all one-sided. There's no historical record to sustained that view or that compares to what's happened during the pandemic. So it is a mystery to me how they come about with such strong growth forecast and inflationary fears. I think the FED has a better grasp of what likely happen than the Wall Street consensus. However that narrative will not die so soon and we can expect it to go on until proven wrong.