Thursday, August 27, 2020

Should the Fed Boost Inflation?

 Financial FAQs


The Federal Reserve is so desperate to support growth in this pandemic that it wants to allow inflation to rise above its 2 percent target range. Why? But inflation and rising prices are usually a sign of economic growth. But inflation is currently running at less than 2 percent--1.81 percent annually--(see below graph).

Money is cheap because interest rates are close to zero, yes zero percent. The current 10-year benchmark Treasury yield is actually minus –1.0 percent after inflation, meaning the U.S. Treasury is paying investors to hold them at present, per the above FRED graph. 

That’s because money isn’t being used in productive enterprises at the moment, such as building infrastructure, or boosting education spending, or environmental protection, or put in the pockets of lower-income folk that spend most or all of it.

Actually all of those enterprises would pay it forward for the benefit of future generations, but that isn’t happening in the private sector, which is why we will need government to do the investing that private commerce will not.

Corporations and the wealthiest of us aren’t investing much in the future because the present is so uncertain. The dangers of another shutdown due to COVID-19 are very real, given that the U.S. is behind every other developed country and many developing countries in conquering this pandemic. We have the highest number of COVID deaths with Brazil, Mexico, and India next in line.


So Fed Chairman Powell’s announcement that the Fed will ease credit conditions even further is an attempt to pry some of the money loose from the savers with the hope it will be actually be spent on more goods and services.

That is a good thing in itself, but no guarantee that it will boost inflation or economic activity unless there are well-planned public programs to spend it. There is plenty of excess capacity in our COVID-19 economy, so production could be boosted quickly and in turn boost supplies, which keeps prices and inflation from rising too fast.

This is a truism lost on some economists even. Printing lots of money doesn’t necessarily produce higher prices and inflation, unless there is sufficient demand and/or there are production bottlenecks, hence a supply scarcity.

The only real guarantee that we will invest in the future, in what is essentially the public sector that belongs to all of US, is when government is the good caretaker of those public resources—the air, water, natural resources, public education and health services.

It isn’t socialism, but a more robust capitalist system, a public/private partnership that can benefit all Americans.

Harlan Green © 2020

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