Friday, February 19, 2021

Former Federal Reserve Governor Warns of Developing Price Inflation

It seems that only current members of the Federal Reserve Board monetary policy committee, the FOMC, have no fear of developing price inflation. 

A letter to the editor from H. Robert Heller, who was a member of the Federal Reserve Board of Governors (August 19, 1986 – July 31, 1989), appears in today's Wall Street Journal.

He is a Keynesian and not against all spending but he knows what is coming from the Biden administration is over-the-top :

Vast new spending plans are being considered by Congress to help overcome the effects of the pandemic. While Democrats want to spend $1.9 trillion, most Republicans argued for much less. A group of 10 Republican senators made a counteroffer of $618 billion but President Biden wasn’t interested. The bipartisan Committee for a Responsible Federal Budget, of which Janet Yellen was a director until her recent elevation to secretary of the Treasury, points out convincingly that the actual output gap that needs to be closed in 2021 amounts to only $380 billion. Therefore, all the spending proposals on the table amount to vast overkill.

Add to the proposed fiscal stimulus the record-breaking increase in the money supply M2 of more than 25% on a year-over-year basis and you have an enormous potential for future inflation. But to make sure that inflation will actually increase, the administration also proposes a doubling of the federal minimum wage to $15, an action that will set an effective floor to any union demands for future wage increases.

At a time when the Atlanta Federal Reserve’s current quarter’s GDP growth forecast (GDPNow) is at 9.5%, this trifecta of economic impulses is likely to ignite strong inflationary forces that will run rampant once the continuing vaccination program achieves herd immunity and the nation’s animal spirits are allowed to roam free again.

Robert Heller

Belvedere, Calif.


1 comment:

  1. "...once the continuing vaccination program achieves herd immunity and the nation’s animal spirits are allowed to roam free again."

    This line makes me want to gag for a couple of reasons. It's like if John Maynard Keynes and Scott Gottleib had a baby together.

    Heller's mangled way of referring to voluntary human exchange of goods and services aside, he is right. The nation's desire to service the needs and wants of fellow citizens has to be less restricted for inflationary pressure to really take off. If that does not happen, i.e. if we don't open up, inflationary pressures will be less severe.

    I suspect some folks in the Biden camp understand this. And they are perfectly willing to find a way to keep economic activity under severe restriction for as long as possible (like the "zombie economy" of mid 1930s Germany.) That would achieve the dual goal of enriching Biden's cronies, while keeping price inflation numbers reasonably low. And doing it all for the public good.

    Can they pull it off? Doubtful but a non zero chance I suppose. Desantis is a real problem for them. They'll have to figure that one out.

    David B.