INFLATION QUESTIONS PERSIST | CROUCH CONNECTION |JUNE 2021 "ADV"
INFLATION QUESTIONS PERSIST
I continue to receive calls from clients concerned by the hysteria in the media concerning the threat of inflation. Many prominent economists forecast that the stimulus provided by Congress and the Fed will soon result in runaway inflation, causing interest rates to skyrocket and pop the “bubble” forming in asset values (including the stock market).
But comments from the Fed Governors as well as Chairman Jerome Powell send the message that everyone needs to relax. They believe that the long-term forces affecting inflation are still DIS-inflationary and that once the stimulus runs its course that the dis-inflationary forces will emerge again. So who are we to believe?
“SIGNS OF INFLATION EVERYWHERE”
The massive fiscal stimulus provided by Congress has ignited a surge in demand for all types of products that our supply chain has struggled to meet. Crippled by the Covid cutbacks and workers reluctant to return to work, the shortages have caused price increases that are almost shocking. The important question, I would argue is…HOW LONG WILL THE SHORTAGES LAST?
Breaking the stimulus into its two primary components, fiscal stimulus (provided by Congressional action) or monetary stimulus (provided by Federal Reserve action) helps us sort out the potential economic scenarios.
The stimulus provided by Congressional action to increase government spending has been huge, dwarfing any stimulus ever provided during previous recessions. Furthermore, instead of bank bailouts, the stimulus program designed by the Trump administration’s brilliant Treasury Secretary, Steve Mnuchin (pardon the political statement), directed the stimulus payments straight to the American people who can be faithfully depended on to spend any money they have available.
This spending has created sales of products and services for American businesses and abundant job opportunities for American workers, saving many Americans from financial ruin. The resulting demand for products and services has far exceeded all estimates, causing shortages in many products and the sharp price increases we are seeing.
We may see the fiscal stimulus extended by the infrastructure package now being negotiated by the Biden administration, but many of the benefits provided by the previous stimulus bills will begin to dwindle soon. The somewhat controversial special unemployment benefits are scheduled to end in September and already being curtailed by many states.
In short, the effects of Congressional spending and stimulus will probably be substantially reduced by the end of this year and American businesses will probably have responded to the higher prices by sharply increasing the production of the needed products, meeting the demand for their products.
The result? Adequate availability of products and services equals reduced pressure on prices which means little further inflation or potentially even falling prices for many products.
FEDERAL RESERVE ACTION
In my opinion, the Fed seems to be getting unfairly blamed for most of this inflation we are now seeing. Many pundits are calling on Fed officials to curtail their “quantitative easing”, predicting that it will cause runaway inflation unless it is stopped. At the same time, no one seems to mind Congress discussing another $2 Trillion spending package, even though the current inflation is being caused almost entirely by Congressional spending which will most likely be curtailed soon by Republican and conservative Democrat Senators.
The “monetary stimulus”, provided by the actions of the Federal Reserve have provided stability to our financial system by keeping interest rates low and providing adequate liquidity (money) for businesses to survive until demand for their products and services returns. There is no question that many businesses would not have survived without the support of Fed action to purchase corporate bonds, but that support has now ended.
WHAT ABOUT “QUANTATITIVE EASING”
The other Fed action, a controversial practice called “quantitative easing”, or the printing money and using it to purchase government and mortgage-backed bonds, helps by keeping interest rates low. The pundits say that this will enable rampant government spending, allowing the government to spend the “printed money”, resulting in uncontrollable inflation.
I have read extensively on the subject, and I believe the fears are unfounded. Quantitative easing and the resulting “deficit spending” has not always caused inflation. A good example of this was provided to us by the Bank of Japan which adopted the feared “quantitative easing” on March 19, 2001, in their effort to reverse decades of deflation. They significantly expanded the program in 2013 under Prime Minister Shinzo Abe.
After two decades of significant “quantitative easing” and the highest debt levels of any major nation in the world, Japan has still not been able to create inflation. As of February of this year, Japan was still experiencing deflation instead of the feared runaway inflation. According to a recent Wall Street Journal article, Chairman Powell is trying to keep the US from falling into “Japan’s complex and sticky deflationary mind-set.”
My advice would be to keep your eye on Congress and unless there is a sharp swing in the Senate to support irrational deficit spending on an ongoing basis, inflation will be a relatively short-term problem. Newsletter salesmen and those promoting the latest “inflation protection” products will continue to fan the flames of inflation hysteria, but I would advise ignoring most of what you see on TV.
If that doesn’t work, just give us a call. This is probably more detail than you ever wanted but I enjoy conversations about this stuff and would be happy to give you a more detailed explanation or answer any questions you may have.
Branch Operations Manager
"For 240 years it's been a terrible mistake to bet against America, and now is no time to start."
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