“Davidson” submits:

There is a history of government spending vs periods of inflation leading many to believe that recent COVID-19 economic support cannot but raise inflation in the next few years, perhaps even by a considerable amount. Yet, government borrowing to counter the COVID-19 shutdown even though in the Trillions shows barely a whisper in Real Government Consumption Expenditures & Gross Investment. Why?

If one examines past inflationary periods vs government policies, it becomes clear that inflation arises from regulations raising the cost of business and from the government being careless in getting good value for its own spending. The inflationary impact of Federal regulation is obvious. In the 1980’s Federal Register history vs. then Pres Reagan’s 40% deregulation policies resulted in a dramatic disinflation and “Reagan’s Miracle Economy” (A past note regarding this relationship is available on request). Investors should keep in mind that current policies have reduced Federal regulations such that the Federal Register pages have fallen 30%+. Additional reductions have been announced and should be as disinflationary as during “Reagan’s Miracle Economy” period. Government-funded spending however is dependent on who is actually directing the spending and the purpose of that spending. The answer lays in the details.

Recent government borrowing directed at offsetting COVID-19 is not being spent by the government but has been transferred to businesses and individuals to help transition the impact of this sudden economic decline, i.e. transfer payments. Individuals and businesses in stress have financial survival in mind and stretch every dollar spent to receive the highest value possible. Examination of past government transfer-payments(Social Security, Medicare and etc.) reveals that the act of being careful spenders is not inflationary. It is when the government has not been careful in its own spending to receive good value that inflation rises significantly. Wars, social engineering policies, and national construction programs are good examples.

The current response to COVID19 has been government borrowing to effect transfer-payments to those in stress. This is not likely to create much of an inflationary response in my opinion. This is why the Real Government Consumption Expenditures & Gross Investment series reflects little increase. Government is not the entity spending.

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Governments have a history of sloppy spending and in the process of receive such little lasting value in return that society experiences inflation. Individual and business spending is geared towards receiving greater value than the costs of funds earned. Carefully directed spending is always disinflationary and offsets the cost of government except for those periods when government interferes excessively and creates inflation. Deregulation is another means of directing capital spending back to those who are more sensitive to receiving the highest non-inflationary value.

The lesson is here is that we need a certain level of government to have the right balance of societal organization/regulation for efficient progress on our standard of living. Too much government, however, is detrimental to growth and inflation.

Inflation hinges on whether one’s spending receives value greater than the cost of funds.