Overstimulation Risk

The Case for Inflation
No Worries?
Necessary Conditions
Fed Chair Jerome Powell: We Need More Stimulus and Inflation Is Not a Worry
What’s in Your Investment Kitchen?
Puerto Rico, New York?, and Maine

Among the many strange, unforeseen changes of the last year is a new respect for Keynesian economic theory. Practically everyone in power now agrees that deficit spending produces GDP growth. They differ only on its expected magnitude and duration. The few exceptions are mostly outside the halls of power.

This matters because deficit spending, already higher than ever, is set to grow even more when Congress passes President Biden’s pandemic relief package. I take it as given they will pass it, since Democrats have the necessary votes and look united on the major items. They may tweak some details to satisfy Manchin or Tester but the final amount will be somewhere close to the desired $1.9 trillion.

Coming on top of trillions already authorized in prior bills, a budget deficit that was already approaching $2 trillion before the pandemic, and the Federal Reserve stimulating in its own ways, people are asking whether this is too much. The answer depends on the coronavirus “Gripping Hand.” If the vaccines work well enough, and are administered widely enough, to stop the new variants and enable economic normalcy later this year, all that money might be excessive. Rising consumer demand combined with supply constraints could spark inflation.

If, however, the pandemic continues into summer, it will mean the Gripping Hand is still squeezing us. Employment won’t recover and more small businesses will fail. This relief package, as large as it is, may prove necessary and maybe even too small.

The experts I trust are split on this question, and of course no one really knows. But the debate is important philosophically. Nothing underscores this more than the comment from my personal economic bête noire, Modern Monetary Theory exponent Dr. Stephanie Kelton. Asked whether she was worried about the stimulus bill causing inflation, she said:

"Do I think the proposed $1.9 trillion puts us at risk of demand-pull inflation? No. But at least we are centering inflation risk and not talking about running out of money. The terms of the debate have shifted."

This is precisely what should concern us. No one except a few old classical economists is afraid of growing the debt. That argument is seemingly over, and its absence may be the real story here.

Today I’ll explore where all this may lead.