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Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

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Will President Biden’s economic stimulus cause inflation? Economists are unsure

The notion that massive inflation is a foregone conclusion because of economic stimulus is misguided: https://blogs.lse.ac.uk/usappblog/2021/07/03/will-president-bidens-economic-stimulus-cause-inflation-economists-are-unsure/
The survey asked the experts whether they agreed or disagreed with the following statement: “The current combination of US fiscal and monetary policy poses a serious risk of prolonged higher inflation.” If so, how strongly and with what degree of confidence.

Of the panel’s 43 experts, 38 participated in this survey, and the results indicate considerable uncertainty and differences in views. Weighted by each expert’s confidence in their response, 33% agree with the statement, 36% are uncertain, 26% disagree, and 4% strongly disagree. The short comments that the experts are able to include when they participate in the survey provide more details on different perspectives.

Comments

  • beebee
    edited October 5
    Another look:
    Inflation

    The purchasing power of nominal wealth is inversely related to the price level. That is, a higher price level means one’s money buys fewer goods and services. Inflation refers to the rate of change in the price level over time.

    It is helpful to keep in mind the difference between a change in the price level (a temporary change in the rate of inflation) and a change in inflation (a persistent change in the rate of inflation). It is admittedly difficult to disentangle these two concepts in real time, but it remains important to make the distinction.

    The amount of nominal government “paper” the market is willing to absorb for a given structure of prices and interest rates is presumably limited. A one-time increase in the supply of debt not met by a corresponding increase in demand is likely to manifest itself as a change in the price level or the interest rate, or both. An ongoing issuance of debt not met by a corresponding growth in the demand for debt is likely to manifest itself as a higher rate of inflation. How the interest rate on U.S. Treasury securities is affected depends mainly on Federal Reserve policy.

    As long as inflation remains below a tolerable level, there is little reason to be concerned about a growing national debt.
    stlouisfed.org/publications/regional-economist/fourth-quarter-2020/does-national-debt-matter
  • Socialist fiscal insanity

    Baseball Fan
  • Here's the concept of "Exporting" US Inflation:

    Exporting Inflation to China:
    You might not think that China would want to help the U.S. export its inflation but that is exactly what is happening. Why? China has been the largest exporter of goods in the world since 2009 and their level of exports was increasing since way before then. The primary reason is because they are a low-cost producer. They have low wages and even use “slave labor” to keep costs low. This results in goods flowing from China to the U.S. and money flowing from the U.S. to China. If China were a capitalist country this would result in companies becoming wealthier and people having more money to spend locally and inflating their economy. It would also necessitate that the Chinese companies convert their U.S. dollars into local currency in order to be able to spend it. The exchange process would create a glut of dollars and a shortage of Yuan (aka. Renminbi). Based on the law of supply and demand, this oversupply of dollars should cause the Dollar to devalue on the world market and the Yuan to rise. But the government in China doesn’t want the Yuan to rise because that would make Chinese products more expensive and reduce exports and hurt their economy thus causing unrest and possibly revolt.

    So what does a Communist government do to prevent inflation? They siphon off a good chunk of the profits and buy U.S. Treasury Notes with the money. This pads the coffers of the Chinese Government and creates an I.O.U. on the U.S. Government’s books… but as long as China doesn’t actually try to cash in the I.O.U. nothing happens. It is simply a debit on the U.S. account and all the extra printed money becomes an asset on China’s books. China is happy because its assets are growing, U.S. politicians are happy because they got to spend money on boondoggles that pleased their constituents (while lining their own pockets through “political contributions” from lobbyists) and the only people who are unhappy are those who worry about the growing debt to China.
    how-does-a-country-export-its-inflation

    exporting-inflation
  • edited October 6
    Isn't it funny how when it's government spending to bailout the banks and securities markets, it's saving America but when it's government spending to build/repair roads, bridges, and Internet infrastructure, and to provide healthcare and housing for children and the poor it's a "boondoggle?" Of course, there's this little historical issue with Japan:

    image
  • There is also a belief that there is no way to fairly tax people to pay down the deficit-spending without destroying America. I can think of a few ways based on who benefited the most from previous government/taxpayer-funded bailouts:

    image

    image

    image

    image

    image
  • No need to 'pay anything down', but investing to address current problems and fix things for a better future, quite aside from paying what we already have spent and owe, is always smart. Plus plugging tax dodges.
    Socialist fiscal insanity is good, though, and would make a comedy bumpersticker.
  • edited October 6
    Here is a look at the impact of deficit spending in our still low interest rate world and what the future may hold in store for us despite the deficit's continued growth:

    image

    The Real Cost of U.S. Debt Is Nearer the Floor Than the Ceiling
  • edited October 6
    One question I have: If governments issue Treasury Bonds, municipal bonds and other sovereign bonds to finance their operations and public programs, and these bonds are purchased by wealthy investors seeking interest, how can that be considered "socialism?" Aren't those government-issued securities vital parts of our capital markets and necessary for our capitalist system to function? You could just as easily have a balanced budget or even a surplus in a socialist state if citizens were taxed enough to pay for government services. The debt in some respects is a concession to the wealthy saying yes we are going to have these government services, which you will also benefit from--roads, military, police, etc.--but instead of taxing you fully to pay for them outright we're going to borrow from you and pay you interest for them. And rather than pay the debt down with higher taxes we're going to keep rolling the debt forward. Moreover, the government sector is a massive consumer in the private one, purchasing large military contracts, healthcare and technology services from private companies that wealthy stock investors benefit from, and the government pays for some of those purchases with the debt the government borrows from the wealthy. So again, how is that socialist? If anything, such debt financed spending benefits the wealthy in many ways, as it would certainly with this infrastructure bill. The notion that this is just socialist redistribution is false.
  • Concur with LB.
  • beebee
    edited October 7
    @LewisBraham

    Your last entry reminds me of Ray Dalio's presentation on "How the Economic Machine Works". I recall one quote form his presentation that goes something like:

    "One man's debt (liability) is another man's income (asset)"

    Debt creates what he describes as the long and short term debt cycles. Individuals need to service (repay) there debt (Principal & interest) to the borrower (usually the bank). An arrangement exists whereby the government injects liquidity into the system at a very low interest rate (overnight bank rate). The bank in turns loans this liquidity (money) to individuals and corporations so that they can receive and offer goods and services.

    The money loaned to individuals and corporations needs to be repaid to the bank (both principal and interest). The money borrowed by the bank is only repaid to the government to the extent that it is borrowed and the banks only outlay is the overnight rate of interest. The government repo's (soaks up) any liquidity (borrowed money) that was not used by the bank to extend credit to credit worthy borrowers.

    If credit worthy borrowers add value (labor, innovation, good & services, demand for financial assets) they are able to both pay back the bank and grow the economy. It all works.

    When borrowers default, the systems grinds to a halt.

    I'm sure you understand all of this, but too many (myself included) Ray Dalio does a great job explaining it all (see video below).

    Getting back to inflation. It seems a strong economy should both inflate (have elements good inflation) and deflate (have elements good deflation) simultaneously (would be nice).

    IMHO, Biden's bill should be looked at through that lens.

    When is Inflation good?
    how-can-inflation-be-good-economy

    why-is-inflation-good

    When is Deflation good?
    can-deflation-be-good

    Ray Dalio's Presentation:


  • What are the causes of Inflation?
    There are two main causes of inflation: Demand-pull and cost-push. Both are responsible for a general rise in prices in an economy. But they work differently. Demand-pull conditions occur when demand from consumers pulls prices up. Cost-push occurs when supply cost force prices higher.

    You may find some sources that cite a third cause of inflation—expansion of the money supply. The Federal Reserve explains that it's a type of demand-pull inflation, not a separate cause of its own
    causes-of-inflation-3-real-reasons-for-rising-prices
  • edited October 7
    Note the language in the original story that the survey of economists was done by "the Initiative on Global Markets Forum (the University of Chicago Booth School of Business." These are Harvard, Yale, Princeton, and Stanford economists surveyed by a business school--not exactly bastions of radical leftwing ideology. Dalio has a particular world view, which slants towards Ayn Rand, yet even he recently acknowledged something has to be done about inequality. But his economic predictions have been wrong in the past, in fact quite recently: https://bloombergquint.com/business/for-bridgewater-a-year-of-losses-withdrawals-and-uneasy-staff And hedge fund/money managers in general have had a particular anti-Keynesian libertarian slant that has proven them wrong many times: https://theatlantic.com/business/archive/2013/05/if-hedge-funders-are-so-smart-why-are-they-so-relentlessly-wrong/275700/ The thing is educated people disagree on this subject of inflation, but one thing the stats show is that the notion that there is a one-to-one correlation between the money supply and fiscal spending with inflation is a political fallacy. The causes are complex. I've posted this before but it's worth reposting: https://gmo.com/americas/research-library/part-1-inflation--tall-tales-and-true-causes/

    Moreover, I would add, as you mentioned, that depending on one's perspective inflation isn't all bad, depending on the kind, size and duration of inflation. A lot of money managers dread wage inflation, and it may be the source of real broader inflation. But I think wages for average Americans have stagnated for decades on a real inflation-adjusted basis and have actually declined since the 1970s for the lowest paid workers. Some wage inflation even if it filtered into the rest of the CPI would be a good thing for many people. A higher minimum wage is absolutely in order.

    But the thing I would stress is that no one really knows whether the current economic policies will bring about a period of extended high inflation, and the fearmongering from the rightwing has less to do with economic reality than concerns about having to pay workers more and their taxes potentially going up. The truest response in perhaps the most unsettling one: We just don't know. In fact, inflation from my perspective may be more influenced by Covid-inspired global supply shortages than monetary or fiscal policy.

    Interestingly, from a leftwing MMT perspective you can hear some very different viewpoints from the prevailing ones in the original survey in this interview with Stephanie Kelton who wrote The Deficit Myth: https://dissentmagazine.org/online_articles/monetary-mythbusting-an-interview-with-stephanie-kelton

  • edited October 7
    Nice! @LewisBraham

    I get all “choked up” whenever I hear the party of tax cuts for the wealthy decry “saddling our children with mountains of debt”. Sure. You bet! Bleeds one’s heart. Debt can be good or bad. Most of us wouldn’t have been able to finance a home without debt. Many continue to refinance, putting the proceeds to other productive uses and keeping the economy growing. Muni bonds have financed schools and infrastructure for years, affording everyone a better standard of living. Don’t hear anyone hollering about munis.

    For as long as I’ve followed the economy (a long while) there’s been a “tug-of-war”, so to speak, between the diametrically opposite fears of deflation and inflation. That concern continues to this day with a recent post by @bee raising the deflation specter. And now, here we’re discussing inflation. Most would agree that deflation is the tougher problem to deal with. And, by most accounts, we came perilously close to falling into a deflationary sink-hole during 2007-2008. Let’s not forget that the Depression years were a deflationary period. One less desirable outgrowth of that lovely period was the rise of Nazism in Germany and other parts of Europe.

    “Inflation can be good or bad.” Whatever failings they may have, the folks at the Federal Reserve aren’t dumb. Their stated goal for years has been achieving a 2% inflation target. And they’ve made clear they’d rather over-shoot than under-shoot. While they may not express it openly, they’re scared to death of the global economy tipping backwards into a deflationary spiral and the pain to society that would bring on. Is higher inflation coming? I think so. Invest accordingly.

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