Inflation, spending, and debt! Apparently, increasing these are the only way to restore normal market functions. Last week, in a speech called Navigating Monetary Policy through the Fog of COVID, Governor Lael Brainard, while explaining how the Fed aims to restore the flow of credit to households and businesses, extolled the virtues of inflationism as a formal policy.
True to form, she cited the dual mandate with the concern that:
Inflation has receded further below its 2 percent objective….Nonetheless, with inflation coming in below its 2 percent objective for many years, the risk that inflation expectations could drift lower complicates the task of monetary policy.
When central bankers discuss inflation, they speak as if they actively manage it through their intervention. However, another interpretation is: their lives are better when the cost of living is higher while our lives become more unaffordable. If the aim is 2 percent inflation, then by definition anything below 2 percent must be considered too low, therefore, not preferable. Of course, what seems never to be asked is, If 2 percent is good, why isn’t 4 percent twice as good?
Moving on to spending, Brainard noted that various indicators tracked by the Fed suggest:
household spending increased quickly in response to stimulus payments and expanded unemployment insurance benefits.
Much like the cost of living, which apparently should never go down, so too must households continually spend to keep the economy afloat. Just, how much money households should spend is uncertain for those not privy to the Fed’s data. What is clear, due to COVID-19, we still haven’t spent enough.
More revealing, is the link between money creation and spending increases:
Household spending stepped up in mid-April, coinciding with the first disbursement of stimulus payments to households and a ramp-up in the payout of unemployment benefits, and showed the most pronounced increases in the states that received more benefits.
Data suggests more debt for the nation means more spending for Main Street. On the subject of debt, a heightened risk of defaults has been linked to the crisis; yet there seems to have been a debt crisis even before COVID:
As the Federal Reserve Board’s May Financial Stability Report highlighted, the nonfinancial business sector started the year with historically elevated levels of debt.
For many years, few policymakers have shown concern that, even in the “boom” before COVID, debt levels were on the rise. But why should the Fed worry considering that the solution to bankruptcy is simple:
It remains vitally important to make our emergency credit facilities as broadly accessible as we can in order to avoid the costly insolvencies of otherwise viable employers and the associated hardship from permanent layoffs.
Insolvencies can be avoided by taking on more debt? Perhaps it is true in the short term, but what about the long-term consequences?
If we combine a 2 percent inflation, perpetual increase in debt-fueled spending, and an overall increase in debt levels, it won’t take long for the USA to become distinctly unrecognizable. Asset prices such as real estate, stocks, and bonds, which remain outside the Fed’s purview, will be exponentially more unaffordable for the masses. As for the national debt, it will continue following the path of the money supply and the Fed’s balance sheet. In effect, everything must only go up! This becomes both sad and ironic, since a perpetual increase in prices and debt inevitably leads to disaster.
