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Inflation is not a big risk, as the economic recovery is still uncertain

Last month, Lawrence Summers began criticizing the experience by progressives when he warned that President Biden’s $ 1.9 trillion “Go Big” boost could cause serious inflation.

Surprisingly, Summers served as Treasury Secretary under President Bill Clinton, an economist with impeccable liberal credentials.

When the average person sees that the price of timber triples during an epidemic, Summers’ caution becomes commonplace.

The bond market is also uncertain in recent years. Long-term returns are higher. Inflation is the enemy of bonds, as it reduces the fair value of fixed interest rates raised by investors.

The classic definition of “pursuing a small quantity of goods” does not quite describe the experience of high inflation.

People of a certain age remember the 1970s, when prices tripled from the 1973-74 oil embargo and tripled again from the second oil price spike that triggered the 1979 Iranian revolution. Salaries could not be saved. People have seen their savings shrink (with less purchasing power than they did in the bank a few years ago). The consumer price index rose by a staggering 13.5% in 1980.

This was not comparable to Weimar’s German hyperinflation in the early 1920s, when banknotes became so worthless և they were used as posters, but it was enough to help the steadfast President My’s Carter.

Carter, the drug used by the new chairman of the Federal Reserve Paul Walker (which remains President Ronald Reagan) to break inflation. The sharp rise in interest rates seemed worse than the disease during the 1981 downturn. But Walker succeeded, and inflation eased.

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Some Summers’s concern is that much of the economy is recovering from the epidemic. The massive mass stimulus combined with low interest rates – non-traditional FD assistance, as well as the expected short-term return on consumer-controlled business costs of the epidemic – puts inflation at risk, they say.

Recently, Mary Dali, President of the Federal Reserve Bank of San Francisco, retracted her speech.

“I see it as a scare,” Dali said. “The response to the memory of rising inflation, unemployment, the inextricable link between wages and prices, and the Federal Reserve, which once lagged behind the policy curve.

“But the world today is different, we can not allow those memories, those scars to dictate current and future policies. We must learn from history by not letting it move our actions. We must take into account all the lessons of our past, not just those that frighten us. ”

Indeed, the central bank’s main measure of inflation as of January was only 1.68%. Inflation has rarely exceeded 2% in recent years, which the Fed Golds’ Goldilocks target is “not too cold, not too hot, just right.”

Federal Reserve Chairman ome Jerome Powell is well aware of the central bank’s stance, even on bond nerves. “In a sense, it’s a sign of confidence on the part of the markets that we will have a strong ամբողջական eventual full recovery,” he told Congress, referring to the behavior of the bond market over the past week.

People of a certain age do not remember only the post-Volker world, the “great moderation”, which saw low inflation և proper growth.

The underlying causes of the phenomenon are complex. But one anchor is monetary policy, which prevents inflation from falling for years, as it did in the 1960s and late 1970s. Another driver of low inflation is not thinking fast. Globalization, which lowered prices.

The consequences of globalization have been low wages, lost jobs, and growing inequality in advanced Western economies. Donald Trump campaigned against it, particularly China.

Biden also warned that China would “eat our lunch”, although in particular it meant the need to increase spending on US infrastructure.

However, too much resistance to China could lead to higher inflation. As Harvard economist Kenneth Rogoff put it, “Western countries need to realize that when it comes to world production, China is the cook, otherwise food would be much more expensive.”

Maybe the more expensive “food” is the price we have to pay to reduce inequality and create more and better jobs here. But this must happen in a political environment where the central bank maintains its independence and can avoid inflation, with gradual increases in rates that keep inflation moderate. The alternative is to ignore inflation until there is a sharp drop when the Fed intervenes later.

Based on what we know, Biden’s stimulus is very necessary. investments in infrastructure as well.

Too many people are unemployed, too many sectors are hurting, և Demand is too weak to worry about inflation. We have not yet come out of the danger of a long “epidemic depression”.

Powell insists that any inflation as a result of the recovery will be short-lived. Biden will be promoted by former Fed Chairman and Treasury Secretary Annette Yellen.

As for timber, it is not a canal in a coal mine. This price increase can be explained by the high demand, including the rapid construction of housing, as well as the rise of businesses against robbers and vandals in cities such as Seattle and Portland, which are against the mill that disrupts the epidemic.

The bond market is another matter. The profitability of 10-year-old treasuries is quite low. The biggest risk is not inflation, but this “bond vigilance” forced the Fed to withdraw its support for low interest rates. In that case, inflation will be the least of our worries.


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