Kraken wrote: ↑Fri Aug 06, 2021 12:03 am
I agree that the Fed's measures are counterproductive if the infrastructure bill and the reconciliation bill both pass. Those on top of the covid relief bills are going to be all the stimulus this economy can handle -- we spent something like $3T on covid relief; infrastructure is going to be 0.5T, and reconciliation is somewhere in the ballpark of $3T -- even if that gets compromised down closer to $2T, that's a shit-ton of Keynesian goodness. The way I see this, Manchin telling the Fed to lay back indicates that he's on board with both of the spending bills. Inflation becomes a real problem if the Fed keeps on suppressing interest rates in the face of all this. Rates need to return to historically normal levels. IDK if that's what Manchin's actually thinking, but he's right.
This could be true except it doesn't factor in the past/current output gap and the time frames for the spending bills.
Just to show the work at a rough level. Output gap for 2020 (lost economic output) as estimated in March 2020 was as bad as $4-5T for the balance of 2020 (25% of GDP) aka Great Depression type economic impact. Hence the sharp stock market sell off in March. The government opened the spigot and by the 2nd quarter they brought the gap down to a little over 10% of GDP in Q2 at $550B which was just Great Recession type impact at that point. They spent $3T to reduce the output gap to about 5% in Q3 and 4% in Q4. But still a gap. Not inflationary. That staved off severe systemic DEFLATION which was the real risk. All along Fed was buying distressed assets in mixed tranches via QE.
So the economic butcher's bill (output gap of lost economic output) was collectively about -$1T with $3T added to the Federal debt. In 2021, Q1 output gap was about another $100B. The government said that GDP returned to 2019 numbers. However, since economics is a dismal science there is no consensus on the look forward on output gap. It is estimated somewhere between $500 - 1.5T for 2021 and similar for 2022 even with the American Rescue Plan.
As an aside, I pulled all these numbers from the Committee for a Responsible Federal Budget (
here) if anyone cares to check the work.
Anyway, here is a running total of the potential output gaps estimated - this all assumes no reconciliation bill for illustrative purposes:
2020 (actual): $-1T
2021 (projected): $-0.5T to $-1.5T (with ARP spending of $1.2T or so allocated)
2022 (projected): $-0.5T to $-1T (with no federal support)
Total potential output gap through 2022 is estimated right now at $-2T to $-3.5T. That is table stakes when you are talking about spending.
So where are we on spending. $4.2T or so allocated. Some is unspent and some of that unspent dollars are being rolled forward into the bipartisan infrastructure bill. Some is that undistributed ERAP money, etc. Money that still needs to be worked into the economy. The important takeaway about the bipartisan infrastructure bill is that the money is allocated over 10 years. So roughly +$100B each year.
The reconciliation bill being bandied about is as mentioned about $3.5T which aligns up nicely with the potential top of the range above. That is likely why it is the target. Note that even if the reconciliation bill comes in at $3.5T then the bipartisan infrastructure bill figures in at a rounding error in the whole thing (something like 0.5% of the entire economy in 2020 dollars).
Anyway, as can be seen they are filling a gap. It is hardly a recipe for inflation. That there is signaling that these are the numbers to be spent is why the market is steady. That is why long-term T-bills aren't signaling inflation. The economists have this pretty well buttoned up. The math here is pretty straightforward. Instead current observed inflation is most likely a byproduct of disruptions and changes in the economy. The fluctuations in pricing are and should be expected. Core CPI has been higher than normal, some severely disrupted goods have way higher prices, and that'll continue as all this "stuff" works itself out through market forces. Think of them like ripples in a pond after a meteor hit it. It's what the Fed WANTS to happen to make sure the economy can digest the changes happening. Long-term we'll all be dead and prices will have normalized.
There are risks they get it wrong on scale but it's probably better to be a bit high than a lot low.
And this all above is why Manchin is dead wrong. We will still have waves of evictions no matter what probably. There will be systemic forces pressuring the banking system as foreclosures rise and some assets become stressed. The Fed is buffering all that with QE right now. That he focused on QE in his statement is baffling. QE happens to be neither inflationary or deflationary. He is kicking around a zombie idea from the Great Recession when QE was thought to be about to spur an era of Weimar republic style hyperinflation. Congress got spooked and underspent which prolonged the economic wreckage of the financial crisis. We risk repeating that same mistake if we listen to his brand of uninformed economic opinion.
That is what is so frustrating about these issues to me. The WH is spending tons of effort and political capital to essentially set down the corner stone on a fucking rounding error in the economy because of nitwits like Manchin/Sinema and the chorus of 'very serious people'. I get they are trying to prove a point that we can get things done "together" but the bipartisan bill is such small change. While the GOP is tearing up voting rights. I'll roll out the trademark phrase - we are not a serious nation anymore. It is all kabuki theater. That is why I think Manchin could be a preening moron who loves to be the center of attention or maybe he is the voice of the oligarch who loves to be the center of attention. It is hard to tell anymore.
Edit: I noticed I didn't talk about interest rates. Well that is because they are a side show to the whole thing. The brake available if things get too hot. Which is unlikely when we are talking about a gap though there are misallocation risks (aka business cycle risks). The Fed needs to lag the economy on that and ham-fisted chasing them while the economy is rippling is a dangerous game. I trust the experts on this.