Inflation Could Prove Biden’s Toughest Economic Challenge

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Inflation may soon rear its ugly head, and President Joseph R. Biden and Federal Reserve Chairman Jerome Powell will find it more difficult to control than their spending plans and recent ruminations indicate.

In a crisis, spending, borrowing, and printing money are fine — as long as those are temporary, and we reckon with the long-term consequences for government finances.

In 2020, Congress and President Trump borrowed to spend about $3.3 trillion to lift family incomes, boost unemployment benefits, and support businesses impacted by the shutdowns, but the new Treasury securities were not much scooped up by private investors.

The Fed printed money to expand its holdings of Treasuries by $2.4 trillion, and its overall balance sheet by $3.2 trillion.

The $900 billion authorized in the closing days of the Trump administration, the additional $1.9 trillion proposed by Mr. Biden and his other priorities will require printing even more money in 2021.

Very little of this will be backed by new productive assets or a larger economy — real GDP will not rebound to pre-pandemic levels much before early 2022.

Economists will tell you — or at least those not seeking a job in the new administration or favor among social justice cheerleaders in Congress, the mainstream media, and academia — a lot more money chasing a fixed amount of goods should mean more inflation.

In 2020, we were hardly at risk for two reasons. We weren’t anywhere near full employment, and workers and businesses were reluctant to demand substantially higher wages and prices. And much of the Fed’s newly printed money wasn’t getting into circulation in markets for real goods and services.

If they were not among the unemployed or laid idle by COVID-19, consumers used much of their stimulus payments to shore up savings and pay down debt. Households have long planning horizons and like to spread out income windfalls over many months.

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Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist. He is the five time winner of the MarketWatch best forecaster ...

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