Contrasting Views

I didn’t want to let these two sharply contrasting views on inflation pass by without comment. In the Wall Street Journal James Freeman remarks:

Inflation is surging as Washington prints and spends money at historic levels. Meanwhile Covid-related policies are still making it hard for businesses to staff up and increase production. A former Trump economic adviser isn’t the only one concerned that too much money chasing too few goods may be more than a temporary problem.

The former Trump adviser, Kevin Hassett, served as chairman of the White House Council of Economic Advisers. Now he’s outside government and watching the feds shovel cash to consumers while making life more difficult for producers. Today Mr. Hassett writes via email that “the Biden Administration is providing the biggest positive stimulus to demand since WWII, and at the same time doing everything it can to suppress supply. Higher [unemployment insurance] benefits, closed schools (which keep one parent at home), and promised corporate tax hikes practically guarantee that supply can not keep up with demand. It is a recipe for an inflation shock we have not seen in the U.S. in a generation.”

It’s not just the Biden administration’s reckless fiscal policy at issue. On the monetary side of the Beltway swamp, the Federal Reserve continues to maintain emergency easy-money policies even though the U.S. economy has been rebounding since last summer. And all of the money the Fed has created is not just showing up in markets for virtual coins and actual beach houses. Some Fed officials have dismissed general inflation as merely “transitory” following the pandemic. The Journal’s Gwynn Guilford reports today:

Consumer prices surged in April by the most in any 12-month period since 2008 as the recovery picked up, reflecting both rising demand as the Covid-19 pandemic eases and supply bottlenecks.
The Labor Department reported its consumer-price index jumped 4.2% in April from a year earlier, up from 2.6% for the year ended in March. Consumer prices increased a seasonally adjusted 0.8% in April from March…
U.S. stocks fell and government bond yields rose after the inflation data was released. Investors are concerned that rising prices could prompt the Federal Reserve to move on interest rates sooner than expected.

while Paul Krugman expresses no concern in his latest New York Times column:

Over the past 12 months core inflation was 3 percent, not too far short of the headline number, and in the month of April alone core inflation was slightly higher than the overall inflation.

But a number of economists, myself included, have been arguing for a while that price changes over the course of the next few months will probably be bloated by temporary factors that conventional measures of core inflation won’t control for. A month ago I warned that “we’re going to have a weird recovery,” with an “unusual set of bottlenecks” causing “a lot of price blips outside food and energy.”

Sure enough, those April price numbers were driven to a large extent by peculiar factors obviously related to the economy’s restart. When people talk about underlying inflation, they rarely have the price of used cars in mind; yet a 10 percent monthly rise in used car prices — partly because people are ready to travel again, partly because a shortage of computer chips is crimping new-car production — accounted for a third of April’s inflation. There was also a 7.6 percent rise in the price of “lodging away from home,” as Americans resumed going places amid a waning pandemic.

And then there were “base effects”: A year ago many prices were depressed because much of the country was in lockdown, so that simply getting back to normal was bound to show up as a temporary rise in inflation. White House estimates that correct for these effects show considerably tamer inflation.

These arguments for discounting short-term inflation numbers aren’t after-the-fact excuses. I wrote about bottlenecks and blips a month ago; White House economists warned about misleading base effects around the same time. What we’re seeing is what we expected to see, just a bit more so.

There’s an old wisecrack that one measurement is a point, two are a line, and three are a trend but that doesn’t reflect modern management best practice. Any substantial deviation from the expected or the norm is worthy of formulating a mitigation plan to address. So, what are we seeing today?

and there’s a substantial difference between now and 2008. Since 2008 we’ve had four consecutive administrations, Republican and Democratic, which have added sharply to the debt:

Contrary to what some people seem to believe there is strong empirical evidence that increased public debt suppresses economic growth. What has been learned over the last decade is that there’s not a “cliff” at 100% of GDP but the basic claim of a relationship between debt and growth has not been refuted. Translation: the very size of the debt that the Bush, Obama, Trump, and Biden Administrations have imposed on us will make it very, very difficult to grow our way out of whatever problems present policy is creating.

Which brings me to my basic point. Foreign investors as I have previously documented are already nervous. I want to know what the Biden Adminsitration’s mitigation strategy is for the dollar’s losing its reserve status or a catastrophic loss of confidence in the dollar. Don’t tell me the odds. Tell me the strategy.