“Mr. Biden is calling for lots of new taxes on high-income people and corporations. If implemented, those would yield about $400-B a yr but could never finance his ambitious notions”— Paul Ebeling
There is not doubt that Mr. Biden’s $1.9-T American Rescue Plan (ARA) will give the economy a jolt, but he may regret not spending that money differently.
Many Democratic economists estimate the package is larger than needed to boost aggregate demand in line with potential GDP + it provides aid to many who do not need it.
In Y 2020, VirusCasedemic spending raised the federal deficit to $3.1-T in Y 2020 from $1-T in Y 2019. By purchasing Treasuries and other securities, the Fed printed money to finance it all. Its balance sheet increased $3.2-T and pushed interest rates on the benchmark 10-yr Treasuries below 1%. The 10-yr Treasury rate provides the benchmark for medium- and long-term debt in the private sector.
Households saved much of their stimulus checks. Healthy corporations cut back investment and bulked up cash hoards, and weaker companies borrowed heavily to stay afloat. Investors chasing for yield bought junk bonds, and that leaves many firms heavily in debt but still functioning.
Home mortgages became available at rock-bottom rates. Many who could work from home sought expanded living spaces, farther from commercial centers, and housing prices spiked 13% in Y 2020.
And, Fed intervention kept most state and municipal borrowing costs quite reasonable.
As the US economy recovers, inflationary pressures will increase. Treasury Secretary Schoolmarm Yellen and Fed Chairman Powell assures Congress and The People that he has the tools to hold price increases to a brief surge, but inflation has a history of being tough to control once it gets traction.
LTN economist Bruce WD Barren weighs in, “The Federal Government must think the American public is nor concerned or ignorant regarding inflation. Using the definition developed by then U.S. Federal Reserve Chairman Paul Volcker back in 1980, the current Annual inflation is not 1.68& as was reported for the 12 months ending in February 2021 which was by itself up from 1.40% in January.
“No, inflation, using the reporting methodologies in place before 1980, actually hit an annual rate of 9.6 percent in February, according to the Shadow Government Statistics newsletter Backing out more methods. Even using the change in definition in 1990, the Bureau of Labor Statistics (BLS) still puts inflation at a 5.5 percent rate and getting worse, as well all know. ‘
“Gasoline and fuel, both no longer part of the Consumer Price Index calculator increased much more at 6.4% and 9.9% in February alone. Although down for the month used cars also increased 9.3% over the year. In residential real estate (also not in the calculation of Inflation , according to the CEIC Data, United States House Prices grew 10.3 % YoY in Dec 2020, following an increase of 7.8 % YoY in the previous quarter.
:So, how can inflation be just 1.4%? You figure it out,” says LTN’s economist Bruce WD Barren.
The ARA drive up the federal deficit to $3.4-T this yr but the Fed appears intent to limit bond purchases to $120-B per month or less than 50% the projected deficit. The Treasury benchmark could rise enough to create positive inflation-adjusted yields for investors in corporate, mortgage and state and municipal bonds.
Those rates do not have to rise a lot to burden industries like airlines and entertainment that do not expect demand to fully recover right away, thanks to post-VirusCasedemic chaos changes in corporate and consumer spending patterns. And create new fiscal crises for New York, Chicago, Houston, Los Angeles and other progressive cities.
Households and businesses will be spending more robustly, but supply constraints have already emerged. Manufacturers and home builders face material and labor shortages.
Consumer-product companies are enjoying pricing power.
As the economy accelerates this Spring and Summer, the Fed cannot just tap on the breaks a little to temper inflation without creating collateral damage through high rates for struggling industries and the housing market.
Later this year when mortgage payments and rent moratoriums are phased out, higher interest rates could send unemployment and evictions to socially unacceptable levels even with the aid promised through the ARA. All that, just 1 yr after protesters on the left brought on riots and a breakdown in civil order to major cities and 6 months after protesters on the right stormed the US Capitol.
Higher interest rates could easily become for our generation what the tea tax was for colonial Boston or the Salt Tax in the French Revolution.
On Top of his $1.9-T aid/relief/stimulus, Mr. Biden now wants another huge package to improve private-sector competitiveness, infrastructure, aid the transition to Green energy, EVs, and industrial polices to meet the massive challenge coming from China.
Hang on, and to accomplish greater equity and social justice making permanent the ARA’s 1-yr boost to the child, dependent care and earned-income tax credits and food stamps. Is there ever enough for the non working entitled class of America’s society
Like a young man who squandered his inheritance on high living. Mr. Biden will cry in his tears when he sees the bill for creating a sustainable, prosperous future. When in reality America will resemble the chaos of the French Revolution, and The People march him to the guillotine.
Have a healthy day, Keep the Faith!