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The Washington Times: Inflation Could Prove Biden's Toughest Economic Challenge

January 26, 2021
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Article by Peter Morici in The Washington Times

Inflation may soon rear its ugly head, and President Joseph R. Biden and Federal Reserve Chairman Jerome Powell will find it more difficult to control than their spending plans and recent ruminations indicate.

In a crisis, spending, borrowing and printing money are fine — as long as those are temporary, and we reckon with the long-term consequences for government finances.

In 2020, Congress and President Trump borrowed to spend about $3.3 trillion to lift family incomes, boost unemployment benefits and support businesses impacted by the shutdowns, but the new Treasury securities were not much scooped up by private investors.

The Fed printed money to expand its holdings of Treasuries by $2.4 trillion, and its overall balance sheet by $3.2 trillion.

The $900 billion authorized in the closing days of the Trump administration, the additional $1.9 trillion proposed by Mr. Biden and his other priorities will require printing even more money in 2021.

Very little of this will be backed by new productive assets or a larger economy — real GDP will not rebound to pre-pandemic levels much before early 2022.

Economists will tell you — or at least those not seeking a job in the new administration or favor among social justice cheerleaders in Congress, the mainstream media and academia — a lot more money chasing a fixed amount of goods should mean more inflation.

As new money floods into the new economy, vacant store fronts, restaurants and office buildings — and laid-off store clerks, waiters and building engineers — in cities long mismanaged and whose brands have been tarnished by last summer’s riots and hobbled police, won’t be meeting this new demand.

Mr. Powell believes those will cause only a temporary jolt to inflation but the lessons from the oil crises of the 1970s indicates supply shortages tend to set off self-perpetuating cycles of inflation, as pricing pressures spread through labor and goods markets generally.

Paul Volker, who took the helm at the Fed in 1979, tamed inflation by jacking up interest and unemployment rates. The sum of the two became Ronald Reagan’s misery index and cost Jimmy Carter a second term. Now it could become just as bad.

If the Fed pulls back its stimulative policies as ....

To read this article in The Washington Times in its entirety, click here.

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