The Stagflation Threat Is Very Real But Congress Holds The Key
Here’s two things that could set off a nasty bout of stagflation or worse.
The Alice in Wonderland image is courtesy of Chris Temple and the National Investor.
“What Would it Take for Me to Change my Mind on Inflation?”
Previously I responded to the question A Reader Asks “What Would it Take for Me to Change my Mind on Inflation?“
I mentioned two things.
Monetary Madness From Congress Signed Into Law
The Fed Moves to Make Its Liabilities Legal Tender
My answer has not changed much but I want to further comment on both points starting with point number two.
What If Fed Liabilities Become Legal Tender?
I discussed the legal tender issue several times lately, most recently in Lacy Hunt On Debt and Friedman’s Famous Quote Regarding Inflation and Money.
“Friedman’s famous phrase that ‘inflation is always and everywhere a monetary phenomenon’ would only hold if the central bank’s liabilities were legal tender, stated Lacy Hunt.”
Some may not understand Lacy’s comment relates directly to QE.
Confusion abounds even among well known and widely followed persons. For example, consider this Tweet.
I addressed that inaccurate but widely believed assessment in Will the Fed Balance Sheet Get Spent into Circulation Causing Inflation?
Also consider What is the Best Measure of Monetary Inflation?
A key idea in both articles is “The Fed’s Balance Sheet is Not Spendable Money.”
QE gets reported as an increase in M1 and M2, with nearly everyone going gaga over the increase, but unlike consumer deposits, central bank liabilities are not legal tender, i.e. they cannot and will not be spent.
Not legal tender (Hunt) and not spendable money (Mish) are two ways of expressing the same idea.
Don’t Confuse QE with Congressional Fiscal Stimulus
The three rounds of Congressional stimulus in response to Covid (one round under Trump and two under Biden) were indeed spendable money.
That stimulus also increased M1 and M2 but it should not be confused with QE.
Should the Fed’s liabilities become legal tender, I would quickly change my mind on the possibility of sustained inflation.
Hunt points out that it would “take an act of Congress to make the change“.
I would add the word “legally” to his statement. We have seen the Fed usurp control in many dubious areas.
For example, many of us contend that the Fed’s excursion into buying junk bond ETFs was clearly illegal.
Fed’s New Facility
Please recall Fed’s New Facility Will Buy Junk Bonds With 7-1 Leverage
Mechanics are correct, but legally,
a) SPV purchases using $75B of CARES funding from Treasury are subject to 4003(c)(3)(B) protection against “losses to taxpayers,” and
b) Fed use of “leverage” must still take 13(3) collateral. Neither stocks nor bonds are their own collateral. https://t.co/O0oc7hcGPa
— John P. Hussman, Ph.D. (@hussmanjp) June 15, 2020
John Hussman further commented “It’s not a loophole, it’s an end run. They are not even pretending anymore.“
So legally or not, the concern is the Fed would act to make its liabilities legal tender or expand upon other illegal activities.
The Fed halted it’s junk bond activities but that small excursion could be a trial run for much bigger operations next time.
Millions of people make more being unemployed than they made being employed.
The result is wage pressures, unfilled job openings, and a mini bout of stagflation minus the stag.
Federal benefits expire on September 6 and many states voluntarily ended benefits early.
Those who saved the excess can afford to wait rather than take the first job that comes along.
A return to work will likely be spread out as opposed to one big bang in October.
Monetary Madness From Congress Signed Into Law
The other sustained inflation possibility is monetary madness from Congress.
Recall that Trump temporarily morphed into a mini-Andrew Yang as noted in AOC Agrees With Trump’s Request to Send $2,000 Free Money to Everyone
Trump supporters cheered free money but only because Trump supported it.
Congress passed “one time” stimulus handouts three times but no additional rounds are in the horizon.
Guaranteed Living Wage
AOC, Nancy Pelosi, Elizabeth Warren, Andrew Yang and numerous others would make a Guaranteed Living Wage permanent and index that to inflation as well.
Such an act would guarantee permanent inflation at a high rate.
Biden’s $3.5 Trillion Socialist Express
Please recall the energy aspect of Democrats’ $3.5 trillion proposal: The Greens Hijack Biden’s $3.5 Trillion Budget Proposal (That Could be a Blessing)
The Greens inserted provisions for a “clean energy standard” that would mandate 80 percent clean electricity as soon as 2030. Biden’s goal was 2035.
To achieve that goal, the bill would put a tariff on imports forcing every country to comply.
In addition, the bill would expand Medicare, offer universal “free” pre-kindergarten, two years of “free” college, and other massive giveaways.
Stagflation Guarantee Act of 2021
If that boondoggle passes, it would practically guarantee deep and lengthy stagflation by increasing prices, reducing demand, and lowering growth.
If that’s what you want, call your Congressional representatives and tell them “I want higher prices, lower growth, and higher unemployment. Please vote for the Stagflation Guarantee Act of 2021.”
How likely is passage?
Here is the key question: Are Manchin, Sinema, and Tester On Board Biden’s $3.5 Trillion Socialist Express?
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Mon, 07/26/2021 – 12:55