Monday, October 2, 2023
Home 2021 The Coming Inflation May Be Worse Than the Late 1970’s

The Coming Inflation May Be Worse Than the Late 1970’s

by Paul Ebeling
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#Fed #inflation


Printing money is necessary in a crisis just as long as it is temporary”– Paul Ebeling

In Y 2020, Congress and President Trump borrowed to spend about $3.3-T to lift family incomes, boost unemployment benefits, and support businesses, but most new Treasuries were not bought up by private investors.

The Fed printed money to buy $2.4-T in Treasury securities. Along with purchases of mortgage-backed, corporate and municipal securities, those purchases increased its balance sheet by $3.2-T.

The $900-B aid/relief/stimulus package authorized in the closing days of The Trump Administration, the additional $1.9-T Biden idea and his other priorities, such a multiyear infrastructure program and expanding the Affordable Care Act, will require even more debt and printing more money.

Little of the new debt or money will be backed by new productive assets or a larger economy.

Real GDP will not rebound to pre-VirusCasedemic levels much before Y 2022. A lot of capital assets like vacant office buildings, aircraft and the like will not be needed again for several yrs and have lower intrinsic value now than before the chaos.

You might have thought that more money chasing a fixed amount of goods should cause more inflation but the CPI increased only 1.4% last yr according to the Fed, but that number does not include food and fuel, which are up considerably.

In Y 2020, the country’s economy was at little risk for 2 reasons. We were not near full employment, and workers and businesses often were reluctant to demand substantially higher wages and prices. Plus, much of the Fed’s newly printed money was not getting into circulation in markets for real goods and services.

As new money flows into the new economy, vacant store fronts, restaurants and office buildings in cities with high taxes and mediocre public services such as Manhattan, Chicago and Seattle may downsize.

Construction and manufacturing outside of those places face acute shortages of workers, chips and microprocessors, and prices for those and basic commodities, such as aluminum, iron ore, cooper and cotton are rising.

Fed Chairman Powell told Congress this week that he believes those will cause only a temporary jolt to inflation but the lessons from the Crude Oil crises of the 1970’s indicates supply shortages tend to set off self-perpetuating cycles of inflation, as pricing pressures spread through labor and goods markets overall.

Paul Volcker took the helm at the Fed in Y 1979, he tamed inflation by jacking up interest and unemployment rates. The sum of the inflation rate and the unemployment rate became Ronald Reagan’s Misery Index and cost Jimmy Carter a 2nd term.

Now it could become just as bad.

If the Fed pulls back its dovish monetary policies as the economy accelerates later this year, poorly managed cities may find no takers for their bonds at any interest rates they can afford.

The Fed has indicated that it will tolerate inflation above 2% to push unemployment down to an acceptable mark, but political pressures may mount on Mr. Biden to curb inflation and Mr. Powell’s term is up in February 2022.

Wednesday, the benchmark US stock market indexes finished up at: DJIA +424.51 at 31961.86, NAS Comp +132.77 at 13598.00, S&P 500 +44.06 at 3925.43

Volume: Trade on the NYSE came in at 1..2-B/shares exchanged

HeffX-LTN’s overall technical outlook of the major US stock market indexes is Bullish with a Very Bullish bias in here.

  • Russell 2000 +15.7% YTD
  • NAS Comp +5.5% YTD
  • S&P 500 +4.5% YTD
  • DJIA +4.4% YTD

Looking Ahead: Investors will receive the weekly Initial and Continuing Claims report, Durable Goods Orders for January, the 2nd estimate for Q-4 GDP, and Pending Home Sales for January Thursday.

Have a healthy day, Keep the Faith!

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