Congress and the Trump administration deserve kudos for quickly providing stimulus totaling $3.6 trillion. Conservatives may worry about skyrocketing interest payments on the national debt, but inflation will be the bigger problem.
When the Treasury sells bonds, it may drive up interest rates but how much depends on investor appetite for U.S. securities.
These days that is quite large, as an aging global population is driving up savings, default prospects for developing country bonds are rising, and corporations are bulking up on liquidity to cope with pandemic-related uncertainties.
The net impact on the federal debt held by the public will be less than $3.6 trillion, because some of the stimulus are loans that will be repaid, and more spending will boost GDP and tax revenues.
The Federal Reserve has increased holdings of Treasuries and other assets by about $3 trillion by printing money to pay for those. Nearly all the interest the Fed earns on new assets is remitted to the Treasury, so the net effect on interest paid by Uncle Sam to private investors is negligible.
Consequently, virtually the whole stimulus was paid by running the printing presses.
Financial talking heads like to repeat Milton Freidman's admonition that inflation is always a monetary phenomenon, but that is not quite the same thing as saying more money always causes inflation.
Increasing the money supply must result in either more goods produced or higher prices. If unemployment is low, inflation will result, but underutilized capacity is currently plentiful.
In April and May, consumer prices generally fell and were hardly up over the prior 12 months. Prices appear so tame that some macroeconomists advocate that the Fed should push interest rates below zero to further boost the economy, but that would be a mistake.
The facts on the ground will change as businesses reopen.
Already, consumers are expecting more inflation and investors are demanding higher premiums on ordinary Treasuries over inflation-indexed bonds.
Americans still will be eating at home more, and fast-food and takeout prices are already rising briskly. Restaurants operating even at Phase 3 levels will have to bear more overhead and charge more to keep staff and diners safe while serving fewer customers.
Folks will be flying less but Zooming more. Planes at two-thirds capacity will require higher fares or airlines will take another trip through bankruptcy.
Zoom was a novelty and free before the pandemic, but now that schools and businesses rely on it, better security and functionality are required. Microsoft, Google, and others have jumped in and high-quality software will require paying more, or those businesses will get it out of us by boosting prices someplace else.
Food prices have already jumped — it appears that grocery stores and restaurants have different suppliers and requirements for items like meat, milk, eggs, and vegetables. Some suppliers are dumping milk and disposing of eggs, while others get premium prices for what they have.
Theaters and domestic cleaning services are charging more.
With the shutdown, clearance sales, often online, for apparel and many other household items pushed down prices but with many stores permanently closed, prices will rebound.
Oil prices were depressed by inadequate demand and a foolish price war between Russia and Saudi Arabia, but as the economy recovers so are gasoline sales. OPEC, Russia, and U.S. shale fields have cut production and gas rose to $2.13 a gallon in late-June from an April low of $1.77. Those prices will likely go to at least $2.50.
More stimulus is likely coming to aid state and municipal governments and for extended unemployment benefits. However, the latter should be limited to tax revenues lost owing to the pandemic — the National Association of Governors requested $500 billion. That amount, not much greater sums advocated by Democrats, should be appropriated, and unemployed workers should not be better paid to stay at home than to accept jobs.
The Federal Reserve does not have to accommodate it all by buying so many bonds and printing more money. It could keep its target overnight bank borrowing rate near zero, but still let the yields on 10-year Treasuries rise from below to above 1 percent without much harm to lending for new homes and businesses.
As the economy recovers — even with some structural unemployment in industries like air travel and restaurants — supply bottlenecks will emerge as consumer dollars move to new uses. Without more discipline at the Fed, inflation could easily get out of control.
Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. He tweets @pmorici1
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