Friday, June 18, 2021

Why, if you are not worried about inflation, you are not paying attention. Selected reading.

Kevin D. Williamson , National Review-  The short-term reason to worry about inflation is the obvious one: higher prices. We are in a very risky spot for higher prices right now, because of three mutually reinforcing factors: monetary stimulus (“quantitative easing”), fiscal stimulus (trillions in spending prompted by the coronavirus emergency), and — sometimes overlooked in the policy debate — the interruption of the actual production of goods and services during the epidemic, exacerbated by supply-chain disruptions and higher costs for some raw materials resulting in part from Donald Trump’s misguided trade war with the nefarious, scheming Canadians (among others). 

... the long-term reason to worry about inflation. When the Fed drives up interest rates to slow down inflation, it generally raises borrowing costs throughout the credit markets — including, ultimately, the cost of financing our national debt. Debt service will cost the U.S. government about $380 billion this year, accounting for 8 percent of all federal spending. For perspective, that is about what is spent on undergraduate instruction at all of the nation’s public colleges and universities combined. It’s a big chunk of change — and it’s big with interest rates that are very, very low by historical standards. If the cost of financing the debt goes up, it could easily blow a Pentagon-sized hole in the federal budget. Money that gets spent on debt service is money that isn’t available for other things, whether that’s the ordinary heavy expenditure for Social Security and Medicare or emergency measures in the face of some unknown future crisis. The more you owe, the fewer options you have.
.... a big chunk of our national debt has to be refinanced on a relatively short timeline — months and years, not decades.

Biden and the Fed Are Creating an Inflation Crisis

by BOB LUDDY, The American Spectator - ...Treasury Secretary Janet Yellen asserts that inflation is transitory and shortages are temporary. More than 300 American manufacturers have asked the Biden administration to end disruptive tariffs to ease shortages and reduce costs. Galvanized steel has doubled in price and is only sold on allocation, resulting in severe shortages. Steel in the EU is 40 percent lower in cost, which provides a huge advantage to our EU competitors. The HVAC industry is experiencing the worst inflation since the mid-1970s. Housing is experiencing shortages and inflation. ... gas prices have increased 50 percent in just a few months...
 Powell’s Fed initially contracted the Fed balance sheet but reversed course and began to buy government and other securities at the rate of $150 billion per month. The balance sheet has expanded from $4 to $7.4 trillion. The impact of these purchases is to destroy market pricing of interest rates. Short-term interest rates are near zero, which denies savers any return and forces speculative investments, undermining orderly, rational markets. The worst Fed policy is their promotion of 2 percent inflation, which undermines the buying power of the lowest-income workers. This policy is cruel and stupid. Once inflation begins, it’s difficult to arrest. Paul Volcker tamed inflation in the ’80s, but very high interest rates crushed economic growth.

Brace yourself, here’s why inflation could create a ‘giant wealth transfer’ from lenders to borrowers

By Jillian Berman, Market Watch- Higher prices for rental cars, airplane tickets and uncooked beef roasts have economists and consumers wondering whether we’re living through the start of an inflationary period. 

 It remains to be seen whether these price hikes are just a temporary blip resulting from a pandemic-era mismatch of supply and demand or an indication of inflation, an uptick in prices that continues month after month across a broad array of goods and services. If the latter holds true, at least one demographic could benefit from the trend: anyone, including consumers and governments, that holds fixed-rate debt.

“Inflation could be this giant wealth transfer,” from lenders to borrowers, said Kent Smetters, the faculty director of the Penn Wharton Budget Model, which analyzes public policy proposals’ impact on the budget and economy. “A lot of the lenders are people with wealth and a lot of the borrowers are people without wealth. It’s the lenders who are going to take a bit of a bath, and the borrowers are going to get a discount on what they have to repay.” 

Here’s how that might work: Analysis: 

June 17 (Reuters) - Some economists are warning that surging money supply may exacerbate a rise in U.S. inflation, which is already accelerating at its fastest rate in more than a decade. 

Money supply - which measures outstanding currency and liquid assets - rose 12% year-over-year in April, according to The Center for Financial Stability's Divisia M4 index including Treasuries. The measure has been running between 22% and 31% each month since April 2020, fueled by unprecedented economic stimulus from the Federal Reserve and U.S. government. 

That compares with annual growth of around 3-7% that was common from 2015 to early 2020. “This money supply growth is just so much faster than anything we’ve seen,” ....

No inflation worries at the Fed 

The Wall Street Journal, By The Editorial Board - Let’s try one of those multiple choice questions we all hated on SAT tests. Question: Which of the following doesn’t fit with the others? ...  If you answered D), you aren’t a member of the Federal Open Market Committee (FOMC), which on Wednesday reaffirmed its pedal-to-the-metal monetary policy despite a booming economy and rising inflation that even the Fed anticipates will be 3% this year. … The one hint of change is that seven of the Fed forecasters predicted a rate increase in 2022. But that is only up to 0.25% (two members) or 0.5% (five). The median estimate is still no rate hikes through 2022 and only up to 0.6% in 2023.

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