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A few billion dollars cannot move a multi-trillion inflation needle. Two types of inflation are in play: one is transitory, but the other is not. The Fed cannot control inflation, but we want to believe it can.
Congress has passed the Inflation Reduction Act (IRA), a degraded version of the failed $4 trillion Build Back Better Act. The IRA authorizes $433 billion in new spending.
But not to worry.
It raises $725 billion in new revenues (taxes), for a profit (“deficit reduction”) of $292 billion. We can argue about the assumptions that produce those numbers, but there are more important considerations:
- Renaming the Build Back Better Act doesn’t change its purpose, which is to spend more money, albeit for debatably worthy causes. The ruse that spending reduces inflation is Orwellian doublespeak from a government that aspires to be totalitarian, and reminiscent of Senator Fred Thompson’s 2008 humorous video .
- The $292 billion is “chump change” compared to the $16 trillion that has been printed in the past decade. A couple hundred billion will not move the multi trillion inflation needle in either direction.
- Midterm elections are on the horizon with the economy in shambles. Politics play a key role in spending that makes voters happy.
Since the amounts in question are trivial in relation to the spending that has occurred in the past decade, I’ll discuss the ramifications of profligate spending and will discredit its justifications. This can has been kicked to the end of the proverbial road.
The beginning
It began in 2008 with a stock market crash accompanied by a recession. Congress decided to run an experiment that Japan had been running for years. Modern monetary theory (MMT) postulates that the owners of the money printing press can print all it wants, but it should stop when inflation roars.
MMT appeared to be a success. A recession was averted, and inflation was low, despite $5 trillion spent in quantitative easing (QE), much of it buoying up stock and bond prices. There has been asset price inflation, but that is not measured by the CPI.
The middle
COVID brought another $6 trillion in spending. The U.S. spent 25% of GDP, more than any other country, even Japan. So, $11 trillion so far -- $5 for QE plus $6 for COVID.
No one questions this spending because it was required, but we should. No surprise, much of this $6 trillion was mis-spent on pork and fraudulent claims.
Now, the decade of the 2020s
Inflation is roaring at around 9%, fueled by both types of inflation. Supply shortages and the Urkraine war create demand-pull inflation. This will subside as cargo ships are unloaded and people return to work. Maybe we’ll even return to energy independence.
Cost-push inflation is the classic “too many dollars chasing too few goods.” This type of inflation will last a long time. Its taming requires taxes to suck excess money out of the economy. The Fed cannot control it; it is pretending to do so.
But the spending hasn’t stopped. Infrastructure spending will reach $4 trillion and there’s another trillion in other spending to help Ukraine and other causes, so $16 trillion all in so far.
How money is printed
The printing presses are one-two partnership. The Treasury borrows money. In normal economic times, there are plenty of buyers for these loans, but these are not normal times. The Federal Reserve buys Treasury bonds, swelling its balance sheet above $9 trillion. Bond prices are artificially high because they are being manipulated.
The $9 trillion is used for zero interest rate policy (ZIRP), which the Fed has said it will taper by allowing bonds to mature without replacement. Tapering is the unofficial interest-rate raiser, in addition to official interest rate increases. Left unmanipulated, bonds have historically yielded 3% above the rate of inflation, so 12% in a 9% inflationary environment.
Conclusion
MMT is an experiment of a magnitude that has never been run before. Its endgame has been reached. Inflation is real and not transitory. What happens next will not be pretty and is not affected by theIRA.
Ronald Surz is co-host of the Baby Boomer Investing Show and president of Target Date Solutions and Age Sage, Target Date Solutions serves institutional investors, namely 401(k) plans. Age Sage serves do-it-yourself individual investors.
His passion is helping his fellow baby boomers at this critical time in their lives when they are relying on their lifetime savings to support a retirement with dignity, so he wrote a book Baby Boomer Investing in the Perilous 2020s and he provides a financial educational curriculum.
Read more articles by Ron Surz
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
