Wednesday, March 31, 2021

Why the Inflation Worries?

Financial FAQs

There has been too much talk of inflation, as so-called ‘bond vigilantes’ seek to take advantage of the fear that too much pandemic recovery aid will saturate the financial markets with dollars, creating runaway inflation and boosting interest rates.

That makes sense when so many dollars are in play, right? Not really.

Who are the so-called bond vigilantes that worry about inflation and bond prices? They are usually the most highly leveraged funds that have been buying assets with borrowed money at the record low interest rates that have prevailed since the pandemic and have pushed up some stock prices to stratospheric levels.

A great example is what happened on Monday to a highly leveraged hedge fund investor, reports MarketWatch:

“U.S. stocks pared losses Monday afternoon despite jitters tied to reports that a large investment fund recently was forced to sell massive holdings ($30B) in stocks, causing prices to tumble. Investors were monitoring news reports that former Tiger Asia manager Bill Hwang’s Archegos Capital Management had unwound big bets late last week after facing margin calls.”

We know that margin calls are because banks require investors to sell the underlying assets that were bought on margin when said asset prices have fallen significantly.

So where is the runaway inflation they speak of? The Fed says they want moderate inflation but have the tools to prevent runaway inflation, and will keep a close-to-zero percent short term rate policy through at least 2002.

There is lots of precedence for the Fed holding real interest rates below inflation rates. It helped to finance World War Two, and GW Bush’s invasions of Iraq and Afghanistan. This is when the real cost of money is close to zero and borrowing needs high during such exigencies.

And we are fighting a world war against COVID-19 that is disrupting economies and killing more people than all the other wars.

Another problem with bond vigilantes’ thesis is the root cause of most inflation—higher demand than existing supply. But the demand for products and services has not exceeded supply for decades—since globalization and lower trade tariffs have made goods in particular cheaper to produce and more plentiful.

There has been little problem with the supply-side of the equation in recent decades, in other words, unless we have major disruptions such as this pandemic that creates temporary bottlenecks in the delivery of said products.

There hasn't been a problem with inflation since the 1980s, either.

“Even before the coronavirus crisis, central banks globally were struggling with sluggish inflation, and the pandemic-induced downturn has only made the challenge worse,” said Reuter’s Ann Saphir.

“Too-low inflation is typically a sign of a weak economy. It also tends to drag on interest rates and makes it difficult for central banks to fight recessions with their usual tools that focus on the cost of money.”

That is why several European countries are struggling with what amounts to negative interest rates, such as Denmark where even mortgage interest rates are less than zero.

The above Reuters graph shows that inflation has barely budged (light blue and red lines), even as average hourly earnings are rising at a 5.3 percent clip. One can call this another goldilocks economy with neither too hot nor too cold growth at the moment.

So those most fearful of soaring inflation and borrowing costs are those that are highly leveraged. And we will see that leveraging disappear soon enough as business activity returns to a new normal the Fed is wanting—holding interest rates at or below inflation; thus stimulating a higher demand for goods and services that stimulates a robust recovery.

Harlan Green © 2021

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Thursday, March 25, 2021

We Need A Green Infrastructure Plan

 Popular Economics Weekly

Washington Post

The Biden administration’s $3 trillion infrastructure plan is next on their agenda to boost economic growth. And it will need a tax raise to pay for it.

“I think a package that consists of investments in people, investments in infrastructure, will help to create good jobs in the American economy,” testified Treasury Secretary Janet Yellen in congressional hearings this week, “and changes in the tax structure will help to pay for those programs.”

Yellen and Fed Chair Jerome Powell said there was no problem with any inflationary bulges that might occur with so much spending because it was spending that would boost productivity as well as employment, generating even more growth.

“Our best view is that the effect on inflations will be neither particularly large nor persistent,” said Powell during the same hearings.

The circa $3 trillion infrastructure bill President Biden is proposing should really be treated as if we are fighting another world war, as we treated spending during world War Two. This war to overcome the coronavirus pandemic has killed more people than all prior world wars.

So why even worry about inflation or budget deficits? In fact, rising inflation during WWII created negative real interest rates at the time because the Fed kept rates low to finance the war, just as it is doing now, which really means it is interest-free money (That is, real interest rates less than zero as it was during WWII).

And the infrastructure bill must be a green, environmentally friendly bill because much of it has to mitigate the damage to infrastructure from global warming. Need we be reminded of the recent breakdowns in power grids that can leave millions without water and electricity for days, as demonstrated by the Texas power crisis this year?

The National Resources Defense Council (NRDC) in a 2008 report said, “New research shows that if present trends continue, the total cost of global warming will be as high as 3.6 percent of gross domestic product (GDP). Four global warming impacts alone—hurricane damage, real estate losses, energy costs, and water costs—will come with a price tag of 1.8 percent of U.S. GDP, or almost $1.9 trillion annually (in today’s dollars) by 2100.”

This means an 80 percent reduction in U.S. greenhouse gases alone to meet Paris Accord goals, phasing out most uses of fossil fuels and replacing them with electric energy sources such as wind and solar power.

“Mr. Biden’s infrastructure plan will deal with the meat-and-potato issues that Republicans and Democrats agree are an urgent need,” say NYTimes reporters Jim Tankersley and Anni Karney. “It seeks to rebuild roads, bridges, transit, rail and ports, while also improving power grids and increasing the number of electric vehicle charging stations.”

The plan also requires the development of universal broadband, such as 5G networks that China is already building on a grand scale, a major issue in rural communities. Documents suggest it will include nearly $1 trillion in spending on the construction of roads, bridges, rail lines, ports, electric vehicle charging stations, and improvements to the electric grid and other parts of the power sector, according to Tankersley

There is much more to Biden’s infrastructure plan that will be detailed as we get more particulars. Any delays in passing it will only increase the costs from damage caused by the increasing frequency of hurricanes, tornadoes, wildfires, power failures; so much so that even the U.S. Pentagon says climate change has become a national security threat.

Over the past decade, the Pentagon has consistently, repeatedly cited climate change as a serious threat to America’s national security in official public documents.

“Climate change is a threat in their eyes because it’s going to degrade their ability to deal with conventional military problems, said Michael Klare in an Vox interview about his new book about the Pentagon’s role in combatting global warming, titled All Hell Breaking Loose: The Pentagon’s Perspective on Climate Change. “It’s going to create chaos, violence, mass migrations, pandemics, and state collapse around the world, particularly in vulnerable areas like Africa and the Middle East.”

“It is difficult to put a price tag on many of the costs of climate change: loss of human lives and health, species extinction, loss of unique ecosystems, increased social conflict, and other impacts extend far beyond any monetary measure, says the NRDC report. “But by measuring the economic damage of global warming in the United States, we can begin to understand the magnitude of the challenges we will face if we continue to do nothing to push back against climate change.”

If we can protect ourselves from COVID-19, then we surely can protect ourselves from a warming planet.

Harlan Green © 2021

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Monday, March 15, 2021

We Can Pay For American Rescue Plan

 Popular Economics Weekly

“Consumer sentiment rose in early March to its highest level in a year due to the growing number of vaccinations as well as the widely anticipated passage of Biden's relief measures,” said the University of Michigan sentiment survey. “The gains were widespread across all socioeconomic subgroups and all regions, although the largest monthly gains were concentrated among households in the bottom third of the income distribution as well as those aged 55 or older (dark blue and gray lines in graph).”

Sentiments are soaring because the just passed American Rescue Plan (AMR) will boost benefits of lower and middle income consumers, raising incomes for the poorest 20 percent of families by an average of 20 percent, according to the Tax Policy Center's analysis, while top earners would see their income rise less than 1 percent in an NPR interview.


America can pay for the $1.9 trillion tab because it does not substantially raise the cost of the public debt over the long term if we look at the average annual budget deficit to GDP ratio that hasn’t varied substantially since WWII—the major exceptions being the need to finance recoveries from the Great Recession, and now the coronavirus pandemic.


The cost of financing public debt has averaged little more than 3 percent, historically because economic growth that followed that spending brought the public debt back down to manageable levels, whatever interest rates prevailed at the time.

Financing the $5 trillion in debt that congress has passed since the onset of the coronavirus pandemic should follow the same trajectory. For example, the new $1.9 trillion from the American Rescue will create 7 million new jobs by December, according to the Congressional Budget Office.

“Between 1946 and 2019,” says the CBO, “the deficit as a share of GDP has been larger than that only twice. In CBO’s projections, annual deficits relative to the size of the economy generally continue to decline through 2027 before increasing again in the last few years of the projection period, reaching 5.3 percent of GDP in 2030. They exceed their 50-year average of 3.0 percent in each year through 2030.”

Predictions of real GDP growth are soaring since the AMR’s passage. The Organization for Economic Cooperation and Development projects the U.S. economy will grow by 6.5 percent this year, according to NPR. That's more than twice the growth rate it was projecting in December — thanks in large part to more robust federal aid.

And employment is already surging, thanks to the prior pandemic aid packages. The February employment report added 465,000 private payroll jobs, with 355,000 of those jobs in leisure and hospitality — restaurants, hotels, casinos, theaters—all in the service sector.

All signs point to a robust recovery, in other words, which is why I don’t see any problem with managing a ‘new’ New Deal spending bill when it benefits so many Americans at a time of greatest need, the need to recover from a pandemic that has cost more American lives than our combined wars.

Harlan Green © 2021

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Tuesday, March 9, 2021

Why the American Rescue Plan Is So Important

 Financial FAQs

There are several good reasons for passing the American Rescue Plan (ARP). Firstly, it abolishes once-and-for-all the Reagan-era myth that ‘government is the problem’.

With the thinnest of Democratic majorities, the Biden administration is getting things done; from speeding up of vaccine deliveries, to expanding Obamacare coverage, to requiring masks on interstate and international travel and re-joining the Paris Accord on climate change—all this enabling a speedier economic recovery.

And it benefits so many Americans—more than 60 percent, according to economist Steven Ratner on Morning Joe, in comparing the American Rescue Plan to Trump’s Tax Cuts and Jobs Act that transferred $1.9 trillion in tax cuts to the wealthiest 10 percent of income earners with none of it supporting public spending, whereas the $1.75 trillion in spending from the ARP will benefit programs for more than 60 percent of Americans.


This will include the poorest among US, including minorities and immigrants, according to the PEW Research Center’s latest survey:

“About six-in-ten White (60%) and Asian adults (58%) currently say their personal financial situation is in excellent or good shape. In contrast, a majority of Black (66%) and Hispanic (59%) Americans say their finances are in only fair or poor shape.

The Congressional Budget Office has said that it could take five years for employment to reach levels prior to the pandemic without the American Rescue Plan.

The ARP’s main objective is to put people back to work as soon as possible, according to Fed Chairperson Janet Yellen.

““I think we should want a rapid recovery,” she said in a recent PBS Newshour interview. “We have a large number of workers who are long-term unemployed, and we have to make sure they’re not scarred to the point where this pandemic has a permanent impact on their lives.”

And speaking of the latest strong unemployment report that created 379,000 more payroll jobs, “at that pace it would take us more than two years to get to full employment,” Yellen said in the same interview. The “real” unemployment rate, after factoring in 4 million who dropped out of the labor force after losing their jobs, was more like 10 percent.

The PEW report said that income differences are particularly pronounced, with a gap of 60 percentage points between the shares of upper-income (86%) and lower-income (26%) adults who rate their financial situation as excellent or good. “About six-in-ten adults with middle incomes (58%) say their finances are in excellent or good shape.”

The ARP should also boost consumer sentiment now at a six-month low in the U. of Michigan February sentiment survey, with the entire loss concentrated in the Expectation Index and among households with incomes below $75,000 (the income brackets targeted by the government cash payouts), as I said last week.

“Households with incomes in the bottom third reported significant setbacks in their current finances, with fewer of these households mentioning recent income gains than anytime since 2014,” said the U. Michigan survey.

Need we say more? This is why the American Rescue Plan is so popular with a 76 percent approval rating per the latest Politico survey.

Harlan Green © 2021

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Friday, March 5, 2021

Employment Surge Boosts Recovery

 Popular Economics Weekly

Another sign of a roaring 2020’s economy just came out, per the Bureau of Labor Statistics (BLS) today. The February employment report added 355,000 jobs just to payrolls in leisure and hospitality — restaurants, hotels, casinos, theaters—all in the service sector.

These industries had lost 500,000 jobs during the pandemic. A total of 379,000 jobs were created with manufacturing, wholesale trade and retail sales adding to the total.

“The rebound in job creation in February is likely the start of a major new cycle of hiring. Warmer weather, falling coronavirus cases, rising vaccinations and another massive increase in federal stimulus are likely to act as jet fuel for the economy in the spring and summer,” says MarketWatch’s Jeffry Bartash.

A rebound in the service sector is what economists have been waiting for. It means more consumer spending on travel, dining out, and visits to public venues like sports and museums.

There is one caveat, however. Dr. Fauci and other health experts are warning that the pandemic fight isn’t over. There could be an infection surge in the spring with new variants of the virus beginning to appear for which the current vaccines are not as effective.


CDC head, Dr. Rochelle Walensky, has repeatedly warned that declining case numbers have stalled at a high level, and urged Americans to stick with the recommended safeguards — frequent hand washing, social distancing and wearing a face mask in public — until it’s their turn to be vaccinated.

"Things are tenuous," Dr. Rochelle Walensky said at a White House briefing. "Now is not the time to relax restrictions." The U.S. is still averaging about 70,000 cases a day and the seven-day average is higher today than it was earlier in the week, she said. "This recent shift in the pandemic must be taken seriously," she said. If the infection rate remains at such a high level, the virus, and new variants of the virus, will continue to spread, she said. "We may be done with the virus, but the virus is not done with us,"

This happened with the Spanish flu pandemic of 100 years ago, which prolonged the original ‘roaring 20’s’ recovery for another year. It is literally a race to vaccinate as many people as possible to limit the spread of these new variants.

Harlan Green © 2021

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Wednesday, March 3, 2021

Manufacturing Boosts Economic Recovery

Financial FAQs

Manufacturing activity is roaring back. It joins construction and housing sales as the main drivers of economic growth at the moment. And we need all the drivers of economic growth to keep this economy in the black with what is coming--more climate unpredictability; the Texas deep-freeze being the latest example.

The ISM Manufacturing Index that measures purchasing managers’ sentiments is at 60.8 percent, a two-year high. This means almost 61 percent of manufacturing purchasing managers see increased activity ahead. Reuters lists its strengths:

  • The headline index hit a new post-pandemic high of 60.8, versus 58.7 last month and a forecast of 59.0.
  • The delivery lead-time index was the largest single contributor to the increase (up 3.8 points to 72.0), which is not entirely a positive development, but the orders and production indexes posted solid gains to 64.8 and 63.2 respectively.
  • The customers’ inventory slipped again to another new 11-year low of 32.5, which implies sustained demand in the months ahead.
  • Sentiment remained upbeat in the anecdotal portion of the survey. The survey managers reported that positive comments outnumbered cautious remarks by five to one this month, up from three to one in both December and January.

Fourth Quarter GDP growth was just revised upward to 4.1 percent from 4.0 percent in the second estimate, and economists are predicting even faster growth this year, but that is only if effects of the pandemic subside and there are no more major climate disasters like the Texas, Alabama, Arkansas, and Louisiana deep freeze in which millions lost power and clean drinking water.

The increase in fourth-quarter GDP reflected both the continued economic recovery from the sharp declines earlier in the year and the ongoing impact of the COVID-19 pandemic, including new restrictions and closures that took effect in some areas of the United States. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the fourth quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified.

What is the main driver of all this activity? Higher Personal Income and Outlays, also per the U.S. Bureau of Economic Analysis (BEA).

Personal income increased 10.0 percent (monthly rate) while consumer spending increased 2.4 percent in January as pro,visions of the Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Act enacted on December 27, 2020, began to take effect.

That is a huge jump in personal incomes, thanks to the $900 billion December pandemic aid package.  Much of it is being saved by consumers as they wait for the pandemic to subside before spending more on leisure services like entertainment and travel.

Consumer sentiment had edged downward in early February and is at a six-month low in the U. of Michigan sentiment survey, with the entire loss concentrated in the Expectation Index and among households with incomes below $75,000 (the income brackets targeted by the government cash payouts), as I said last weekHouseholds with incomes in the bottom third reported significant setbacks in their current finances, with fewer of these households mentioning recent income gains than anytime since 2014 (see the chart), said the U. Michigan survey.

That is the main reason the $1.9 trillion American Rescue Plan will soon pass with only minor changes, with or without Republican votes. It will go to those that need it the most to survive this once-in-a-century pandemic. It is extremely popular with a 76 percent approval rating per the latest Politico survey.

And why not with upcoming climate changes predicted to cause even more natural disasters?

Harlan Green © 2021

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