Opinion: Inflation could also be on Biden’s plate earlier than he thinks

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In a crisis, oversized federal deficits and the printing of money are necessary evils – as long as they are temporary.

In 2020, Congress and President Donald Trump borrowed to spend approximately $ 3.3 trillion on raising family incomes, raising unemployment benefits, and helping businesses. Most of the new government bonds, however, were not picked up by private investors.

The Fed printed money to buy $ 2.4 trillion in Treasury stocks. Coupled with purchases of mortgage-backed, corporate, and municipal securities, these purchases added $ 3.2 trillion to the company’s balance sheet.

The $ 900 billion stimulus package approved in the final days of the Trump administration will become the additional $ 1.9 trillion proposed by Biden and his other priorities, such as a multi-year infrastructure program and the expansion of the Affordable Care Act require even more debt and printing money.

Not safe

Very little of the new debt or money is covered by new productive assets or a larger economy. Real gross domestic product will not return to pre-pandemic levels much until early 2022. Many investments – vacant office buildings, airplanes and the like – are no longer needed for several years and now have a lower intrinsic value than before the pandemic.

Economists will tell you that more money chasing a fixed amount of goods should lead to more inflation, but the CPI only rose 1.4% last year.

In 2020 we were hardly at risk for two reasons. We were nowhere near full employment, and workers and businesses were often reluctant to ask for much higher wages and prices. And much of the Fed’s newly printed money did not circulate in the real goods and services markets.

When they weren’t unemployed or not used by COVID, consumers used much of their stimulus payments to prop up savings and pay off debts. Households have a long planning horizon and like to spread the expenditure on income losses over many months.

Companies withdrew their investments as standstills slowed sales and those who saw it were unsure of the shape and size of demand in the wake of the pandemic.

Disorder

Crises like wars and nationwide natural disasters usually disrupt entrenched household and business habits to accelerate the adoption of new technologies, products, and practices – in this case, work from home, ghost kitchens, pelotons, streaming services, and the like. But how much remains to be seen.

Assets like downtown malls and offices are being misappropriated and significant sums of money are pouring into the new green economy. For electric vehicles, factories that make internal combustion engines need to be replaced with factories that make electric motors and batteries. Armies of programmers will replace many auto assembly workers, and Tesla TSLA (-0.77%) could oust Ford F (+ 1.31%) or Chrysler IT: FCA.

As new money flows into the new economy, cities with high taxes and mediocre public services like Manhattan, Chicago, and Seattle can downsize empty storefronts, restaurants, and office buildings, as well as laid-off shop workers, waiters, and civil engineers.

Construction and production in other countries are facing acute shortages of labor, chips and microprocessors, and prices for these and basic commodities such as aluminum, iron ore, copper and cotton are rising.

Temporary price pressure

Fed chairman Jerome Powell believes these will only cause a temporary surge in inflation, but lessons from the 1970s oil crises suggest that supply shortages tend to trigger self-continuing inflation cycles as price pressures on labor – and goods markets in general.

Paul Volcker, who took over the helm of the Fed in 1979, tamed inflation by raising interest rates and the unemployment rate. The sum of the inflation rate and the unemployment rate became Ronald Reagan’s misery index and cost Jimmy Carter a second term.

Now it could be just as bad.

During the pandemic, municipalities and businesses with already low credit ratings struggled with cheap debt to move on.

If the Fed pulls out of stimulus while the economy accelerates later this year, poorly managed cities may fail to find buyers for their bonds at rates they can afford. And investors might conclude that Ford’s F-150 or the Chrysler Ram franchise should be sold and one of their parent companies should be chopped up – much like Craftsmen Tools and Sears.

The Fed has announced that it will tolerate inflation above 2% in order to bring unemployment down to an acceptable level. Political pressures on Biden to contain inflation could increase, however, and Powell’s term expires in February 2022.

Peter Morici is an economist and professor emeritus at the University of Maryland and a national columnist.

More about inflation

Inflation worries are back. Here’s what to worry about – and what not to.

Axel Weber: Inflation could make a secret comeback with devastating consequences

Fed officials were not worried about the rise in inflation, the minutes show

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