Biden’s Latest Spending Plan: More Inflation?

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Biden’s management has or plans to get approval to spend a total of $ 6.0T in additional spending this year. This adds to the regular budget.

It also comes after about $ 9.7T of monetary expansion under the last year of the Trump administration, and in direct spending and purchases of Federal Reserve assets (the Fed’s balance sheet has remained mostly flat since mid-December).

By comparison, the United States spent about $ 4.1T (in 2020 dollars) for military deployment during World War II (i.e., buying aircraft carriers, but excluding the cost of building the shipyard).

Of course the relative size of the economy has changed. In 1945, 40% of US GDP was linked to the military effort.

Biden’s spending programs – which are expected to be implemented over the next ten years – account for just under 30% of the pre-pandemic US GDP.

The figures on the ground

Traditional economics suggests that inflation should continue to be considered mass spending. However, this does not take into account the functioning of the Federal Government.

Some of the expenses are already over. The stimulus controls and the support to unemployment, for example.

But most consist of commitments that won’t begin until a few years from now. Additionally a significant percentage of this is spent abroad, as the United States depends on imports of many manufacturing and construction goods. This is despite the current and former administration’s insistence on “buying American”.

The reality is that the amount of money in circulation (defined as M2) has grown a little over 20% since the onset of the pandemic. This is a bit dramatic on its own (during the great financial crisis with by far the largest bailouts in history, it has grown by 13%).

Just under $ 5.0T has reached the economy so far. However, the trajectory remains the opposite, with most still to be spent.

Where could we go

This week we had some worrying data on inflation.

On Wednesday, the main CPI index jumped to 4.2%. However this was only a continuation of an upward swing seen since the economy began to reopen in January.

Excluding volatile items such as food and energy, it grew 3%, exceeding the Fed’s long-term target. It is at the border where the Fed said they will find it acceptable for a short period of time.

As with the disappointing job data for April, as Secretary Yellen said, it could be a coincidence. But more worrying for the long-term trend were yesterday’s PPI figures. These saw the price of goods leaving the factory grow by 6.2% annually.

Even without the volatile elements, they still grew by 4.1%. Those products will come on the shelves, presumably, this month.

Trying to get back to normal

Businesses could choose to take some of this cost as a loss.

However, with compressed margins after the pandemic, this could be suicidal for many. And at consumers with money through the stimulus, higher prices don’t seem to discourage buyers.

The Fed and even the Biden administration acknowledge the expectations that inflation will rise in the coming months. But they insist it will be temporary.

The next two months will be crucial in finding out who is right.

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