On Aug. 24, The House passed a $3.5 Trillion bill with a deadline set for Sept. 27 for final approval. This has been described by Democrats as supporting the economy and providing a lifeline to working class families.
This may well be the case, however yet again the US is spending their way out of debt, by creating even more debt. And this brings us to tapering. How can the Fed taper when the country has signed off yet another enormous bill with no plan on how to pay any of it back?
The Fed’s balance sheet is now well over $8 Trillion—$4 Trillion of this was in 2020. M2 Money stock has increased by a whopping $5 Trillion since the beginning of 2021. All peacetime records are being smashed in percentage terms of GDP spending and debt.
So what does this do for inflation? Well look where we are now, and these bills further reinforce there are no signs of it letting up.
Fed Chair Jerome Powell has contradicted himself of late. On the one hand it is transitory and in the next sentence he alluded to prices not going back down again, so which is it? Are we baselining at this level of price or is there a thought that we could go higher and baseline there?
That is the fear of the markets, and unless wage inflation rises at the very least to similar percentages, then we could be heading for dangerous times.
So what does the Fed do? This new bill means giving households more money which is detrimental to the economy for output and dangerous for inflation. Why would people go to work minimum paid jobs when they can sit at home and earn the same or more by doing nothing?
And what are people doing with this money? Are they saving it, with an interest rate of 0.1% and over 5% inflation, or investing it? More cash chasing less products raises prices.
So putting to one side the reaction of the markets, if and when the Fed does taper, it would appear any tapering would be temporary and perhaps even very small. They may reduce their bond buying scheme, but they will have to increase printing for years to come to cover every other aspect of the seemingly unwavering appetite to spend money they don’t have.