Inflation May Be On Biden’s Plate Sooner Than He Thinks

focus photography of person counting dollar banknotes

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More Money + Reduced Supply = Self-Perpetuating Inflation Cycle  

In a crisis, oversize federal deficits and printing money are necessary evils—as long as those are temporary.

In 2020, Congress and President Donald Trump borrowed to spend about $3.3 trillion to lift family incomes, boost unemployment benefits, and support businesses, but most new Treasuries were not scooped up by private investors.

The Fed printed money to buy $2.4 trillion in Treasury securities. Along with purchases of mortgage-backed, corporate and municipal securities, those purchases increased its balance sheet by $3.2 trillion.

The $900 billion stimulus package authorized in the closing days of the Trump administration, the additional $1.9 trillion proposed by Biden and his other priorities, such as a multiyear infrastructure program and expanding the Affordable Care Act, will require even more debt and printing money.

Not backed 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 rebound to pre-pandemic levels much before early 2022. A lot of capital assets—vacant office buildings, aircraft, and the like—won’t be needed again for several years and have lower intrinsic value now than before the pandemic.  

Economists will tell you more money chasing a fixed amount of goods should cause more inflation but the CPI increased only 1.4% last year.

In 2020, we were hardly at risk for two reasons. We weren’t anywhere near full employment, and workers and businesses often 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 idled by COVID, 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 spending of 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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