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It could be a Morning in America moment that further energizes an economy already on the brink of bursting, reduces economic inequality, and credits Biden with the kind of economic hero status Franklin Delano Roosevelt enjoyed after the Depression and Ronald Reagan during the boom days. . 1980s.
Or it could be a fire accelerator for global markets as gasoline prices skyrocket, house prices soar, speculative assets soar and investors increasingly fear the kind of sharp rise in inflation that can strike at remarkable speed if the government spills too much gasoline on an already warming economy. .
It will be a moment of glory for Biden when he signs the new Relief Act on Friday, the centerpiece of his first order of business. But a sunny end is not entirely guaranteed, with the nation taking an almost entirely new path in managing the economy.
“If this works well, Biden will be considered a hero and he will deserve it,” said Len Burman, an economist at Syracuse University and co-founder of the Tax Policy Center. “This is the first time that we have really provided enough stimulus and the risk is that it is too much. And inflation is a real risk. But if it works badly, at least we’ll know the outcome of a great experiment like this. “
The impending enactment of Biden’s US bailout comes as the economy is already showing signs of recovery with the acceleration of Covid vaccinations and the lifting of more restrictions by states.
The economy created a surprisingly high 379,000 jobs in February, with expectations for much higher numbers to come as bars and restaurants reopen and Americans begin to travel in much higher numbers again.
CEO confidence recently hit a 17-year high as businesses prepare to return to a near-normal economy later this year. Small business confidence is also increasing, but at a more cautious pace. Consumers in the world’s largest economies also have nearly $ 3 trillion in additional cash accumulated during virus lockdowns, meaning demand for everything from trips to cars to new goods is expected to increase further. .
Signs of inflation are already appearing across the country, with gas prices skyrocketing and likely to rise. New and used car prices are also on the rise, as are house prices in many markets, raising concerns among policymakers about removing people prices.
And then there are the long-standing stock markets and largely speculative assets like Bitcoin which continue to soar amid historically low interest rates and giant injections of liquidity into the system from the United States. Federal Reserve and Congress.
The stock markets took the lead this week in the latest market euphoria. GameStop, the “stock meme” propelled by chatroom traders, has skyrocketed alongside other symbols of individual investor enthusiasm, such as electric car maker Tesla.
Millions of Americans will soon receive thousands of dollars in stimulus payments along with increased unemployment benefits, a huge expansion of child tax credits, much more generous health care subsidies, and targeted relief for small children. businesses, especially those owned by people of color and women.
Progressives are applauding all of these things as major breakthroughs that will both boost the economy in the short term and perhaps reduce the economic inequalities that have only worsened during Covid.
And many economists also note that the need for more relief among Americans’ huge band-aids is still alive and well. The country remains at around 11 million fewer jobs than the number of jobs that would have existed without the Covid lockdowns. The unemployment rate remains high at 6.2 percent and would be closer to 10 percent if the millions who left the workforce during Covid – a figure dominated by women – were included.
While Republicans almost uniformly complain that the Covid package is far too large and wasteful, economists generally take a more measured tone.
There’s certainly a chance it’s too big, they say, and could lead to big price spikes and faster Fed interest rate hikes. Tech stocks, even stocks, and crypto assets could all take hits. But it might not necessarily be a bad thing if the bubbles are slowly deflating and not all at the same time.
“There really is no choice but to provide this kind of support, and we’ve been living with sub-optimal inflation for almost two decades,” said Mark Zandi, chief economist at Moody’s Analytics. “Bring on the inflation. Let’s see it before we worry about it. And the interest rates are too low anyway. Investors are totally unprepared for higher rates and inflation. “
“The markets are sparkling,” Zandi added. “And it wouldn’t hurt to get some starch out of it as soon as possible before those bubbles can swell much more.”
This is the most optimistic view of the new liquidity rain that is about to befall America: a slight readjustment in the markets, slightly higher interest rates in the economy and much lower unemployment at the same time. to a sharp reduction in economic inequalities. This is Biden’s dream scenario.
The most worrying prospect is that a massive glut of consumer savings – complemented by even more stimulus checks and a final pandemic – will create a massive demand spike with supply nowhere near enough to meet it. That would mean sharp price hikes that could force the Fed to several rate hikes sooner than expected.
Such a campaign of increases would make borrowing costs much more expensive for consumers at the same time as their purchasing power decreases. It would also make the burgeoning national debt service cost much higher and possibly crush Biden’s hopes of a multibillion-dollar stimulus package, which already faces strong opposition from Republicans.
“Our debt is clearly on a totally unsustainable path and we just don’t know that rates are going to stay this low forever,” Burman said. “If the markets had the idea that the United States was no longer as safe as a safe haven, rates could go up very quickly. It is not a problem “for the moment”. And it makes sense to invest in smart things right now. But it can become a problem.
Even before further stimulus measures, economists expected very robust growth in 2021 as the country – hopefully – escaped the Covid tractor beam. The addition of the new stimulus has estimates of gross domestic product growth for the year around 7 percent or even more, numbers not seen since the 1980s.
This growth could lift people out of poverty, drive up wages in a non-inflationary way, and make Biden the status of an economic hero. Or it could trigger the kind of inflation that vaporizes the purchasing power of consumers and prompts the Fed for crushing rate hikes.
“There are clearly policy makers – especially those on the left – who have forgotten how damaging inflation can be,” Steven Ricchiuto, chief US economist for Mizuho Securities, said in a note to clients. He added that he wasn’t very worried about it – at least for the time being.
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