#economy #2021 #growth #inflation #money #business #interest #government #spending #labor #demand #Fed #Biden
“The final numbers will show growth was 5.5%, unemployment was down to 4%, inflation was 7.5%, and growth in Y 2021 was higher than at any time since Y 1984“–Paul Ebeling
The Big Q: What will happen in Y 2022?
Most of the growth was fueled by huge increases in government spending and extremely expansionary monetary policy. Households were given thousands of dollars in free money from the federal government. Much of that free money was saved, especially during lockdowns.
As lockdowns ended and the economy re-opened, consumers went on a spending spree, helping to create excess demand in the economy.
GDP reached the pre-VirusCasedemic output level by July of 2021, and business attempted to grow even more, but they were constrained by a steep decline in available workers.
The combination of the big excess demand and somewhat constrained supply led to rising prices. That, with policy-driven increases in energy prices, wage inflation caused by the labor shortage and vast increases in the money supply matched with near Zero interest rates, created so much excess demand that inflation hit a 40yr high.
The economy did reach a full employment level partially, simply due to the 3.5 million workers who left the labor market during the pandemic and have not returned.
The Big A: Economic growth will continue to be strong. Business will get creative and substitute capital investments in automation or outsourcing for labor where possible.
And as long as the virus does not become severe enough to cause shutdowns, the negative economic impact from the virus should not be severe.
That being the case growth will likely be in the 4.5% zone.
Inflation will be a major problem
The federal government has deficit spent nearly $6-T in the last 2 yrs. It continues to deficit spend about $200-B monthly today. That is pure excess demand and is the main driving force of this current inflation.
Households are full of free money that continues to be handed out by the federal government. As a result, consumers are demanding more goods and services, and they are willing to pay more for them.
The Biden administration will certainly not reduce consumer spending, as members of the administration want to spend trillions more.
The rest of the excess demand in the economy is a result of the extremely expansionary monetary policy. The Fed has increased the money supply by 20% in the last year while keeping interest rates near Zero. That has caused massive excess demand, especially in markets that are interest-rate sensitive and use large amounts of debt financing. The housing market and the automobile market have for example seen huge price increases.
How long this continues and how high inflation gets depends upon how quickly the Fed reverses course. Fed officials have started to slow the growth of the money supply by reducing their monthly bond buying. They say they will continue this until March. After that, they will “consider” raising interest rates. Even if they do interest rates will still be near Zero.
My work shows that by June, the inflation rate could approach double digits (it is likely that already). If that is the case, the Fed could act more swiftly and drastically.
That means instead of raising rates by 1/4% 3X this yr, their current forecast, it will be forced to raise rates by a 1/2% or more and raise them more frequently.
If the inflation persists, the Fed may well get yet more aggressive.
And if it gets too aggressive and take too much demand out of the economy, a recession may follow, as was the case in Y 1981. Back then, to stop the double-digit inflation, Fed Chairman Volker was forced to push interest rates to double-digit levels. A severe recession followed.
As I see the scenario today for Y 2022 the Fed begins to raise interest rates in March + 2 more times before yr-end by a 1/4 pt each time, meaning rates will be a bit higher than they are today.
So the US stock market should continue North into 1-H of the yr.
International LTN economist Bruce WD Barren weighs in: “Paul, you are correct in you analysis, most of the growth was fueled by huge increases in government spending and extremely expansionary monetary policy. Households were given thousands of dollars in free money from the federal government.
“Fortunately, much of that free money was saved, especially during lockdowns. However, the bad side of this strategy is that the current Administration over mortgaged our children’s and their children’s future by increasing our national debt beyond questionable limits.
“Yes, we had a pandemic and recovered but was this fiscal monetary strategy really worth it to America’s future, with uncontrollable debt added to an already overly debt Nation? Economist and voters will question this for years to come as to whether or not this strategy should had been invoked.“
Have a prosperous day, Keep the Faith!