Politico: 'Crazy Things Happen': Biden's Next Spending Spree Fuels a Fight Over Risks

Article by Ben White in Politico

President Joe Biden is charging ahead with plans for a $3 trillion federal spending spree just after pumping nearly $2 trillion into an already growing economy.

Even some supporters of the effort are watching nervously for unintended consequences on the road to getting a deal.

The unprecedented flood of federal dollars — should it materialize — is starting to worry a contingent of Democrats, economists and investors who fear that at least some long-held economic views around federal spending will reassert themselves and trigger painful costs.

Among them is the long-held fear that massive spending — coupled with persistent easy-money policies from the Federal Reserve — in an already firming economy could spark a wave of inflation, a disorienting spike in interest rates and a painful pullback in a broad range of currently high-flying assets, from home prices to tech stocks to the newer fad of “non-fungible tokens” and Special Purpose Acquisition Companies (SPACs) that saw a flood of investor interest in recent months.

“History shows us that when money is effectively free, crazy things happen,” said Rep. Jim Himes (D-Conn.). “And we are starting to see lots of crazy things in the equity market, the high-yield bond market, SPACs and tokens. Oftentimes this kind of thing does not end well at all.”

Among the most critical questions is whether pumping trillions more dollars into an economy that’s already catapulting out of the worst of the Covid-19 epidemic, could lead to the kind of overheated conditions that trigger a new era of too much inflation — the kind that historically has required the Fed to hit the brakes, even if it means triggering recession.

“My concern is that this is taking us further into substantial risk territory,” Larry Summers, the former top Obama and Clinton administration economic official, who has emerged as the most prominent Democrat warning of unintended consequences. “We either do what we did during Vietnam, which is explain inflation away and attribute it to transitory factors until we wake up one morning and we have 4 percent inflation expectations, or we aggressively try to contain it like we did after the Korean War and we have a recession. Both of those are substantial risks along with the risks to the dollar and of asset price bubbles.”

“Powell’s goal is to drive broad unemployment down, and he wants to keep maximum liquidity in the system and to not adjust policy anytime soon,” said Andrew Slimmon, managing director at Morgan Stanley Investment Management. “The net result of highly pumped up liquidity is you start to create asset bubbles in many places.”

Slimmon, like many on Wall Street, is not at all sure when the combination of massive federal spending and Fed easy-money policies will spark inflation that could lead to many of these bubbles bursting. “I don’t know why it ......

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