Shoveling Out Trillions to Stave Off Recession.

Author:Smith, Richard

With breathtaking speed, the Federal government implemented monetary and fiscal stimulus programs to inject trillions of dollars into the economy to counter the impact of COVID-19. Can we afford it? Are there unforeseen consequences down the road, such as inflation?

The two trillion dollars represent about one percent of the U.S. asset base, so it is far from being financially ruinous. The Federal Reserve action of lowering interest rates and driving the 10-year treasury yield into negative real yield territory causes concern that it will eventually produce inflation--but maybe not.

The Great Recession of 2008-09 contains interesting and important economic history lessons regarding inflation. In response to this severe downturn, interest rates were reduced to near zero and the world was flooded for many years with U.S. dollars, yet inflation remained stubbornly low. The classic scenario of too many dollars chasing too few goods did not unfold.

The world simply was too productive, spitting out goods and services at a rate unheard of just a few decades earlier, primarily due to new technologies in the fields of manufacturing, communications, transportation, and information systems. What ensued were too many dollars chasing too many goods, neutralizing the inflationary effect. By logical extension, deflation, to some extent, most likely would have occurred absent the monetary and fiscal stimulus. In short, inflation (or deflation) is the interplay between the money supply and productivity.

One of the best barometers and leading indicators of inflation is a basket of commodity prices which have, in real terms, generally been depressed over the past decade, not government statistics, which are lagging indicators and can be improperly defined and collected, hence less reliable.

Since this is a national emergency, a substantial fiscal stimulus is warranted, assuming it is applied properly--of course that is a big assumption. Though large chunks of fiscal stimulus are designed to meet short-term needs, like a spike in immediate health-care costs associated with the virus, and to soften a variety of financial hardships, there will be a significant set-asides for longer-term projects to stimulate the economy.

Even prior to this national emergency, there was much debate regarding projects to "rebuild our crumbling infrastructure." The response always should be to build a business case, on a project-by-project basis, for public dissemination. With a...

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