Why haven’t prices in the United States gone up if the government doesn’t stop spending dollars | Economy | News

Money in circulation is rising, but prices are not rising.

And the thing is, although the U.S. government has been flooding the economy with dollars in recent months, inflation remains at moderate levels, something that calls into question a classic belief of many expert economists.

In fact, the overall price index was 1.4% over the past year. Although the money circulating in the economy has increased by at least 25.8%, according to data from the Federal Reserve.

That is, one in four dollars in circulation was created in the last 12 months.

With Donald Trump in the White House, the government adopted an expansionary policy based on direct money transfers to families and businesses, the expansion of the money supply, maintaining zero rates, and purchasing debt for the Federal Reserve.

His successor, Joe Biden, seems determined to maintain and even deepen that policy.

Biden is pushing in Congress for a $ 1.9 trillion stimulus plan, which has warned some economists of the risk of rising inflation and the consequences it would have on the country’s recovery.

Rather, the question is why there is no inflation with all the money spent in recent months.

The fear of inflation

Lawrence Summers, a former Secretary of the Treasury who has held several senior positions in the Bill Clinton and Barack Obama administrations, recently published a column in the paper The Washington Post in which he warned of the risk of Biden’s plan “ unleashing inflationary pressures never seen in a generation. ”

And while prices are generally stable, the truth is that there are certain markets that have seen significant gains, such as the Wall Street stock market where the SP500 index has grown over 15% in the last 12 months, including slightly less than 50% since the low in March.

Or the real estate market, which has grown by more than 11.6% in the country in the last twelve months, according to the home price index compiled by the Mortgage Loan Corporation, known as Freddie Mac.

Steve Hanke, a professor of applied economics at Johns Hopkins University and a member of President Ronald Reagan’s board of economic advisers, told BBC Mundo that “inflation is brewing, but around the corner”.

Hanke points out that there are already some rising prices that indicate an early turnaround, such as crude oil and other commodities.

The zero interest policy, which aims to encourage activity, also diminishes the profitability of money deposited with banks, pushing large sums into the stock markets and higher risk assets, increasing their value.

Hanke predicts that “when inflation rises, the Federal Reserve will panic and have to raise interest rates, causing a lot of people to lose money in the stock market.”

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But that’s not what economists with a different orientation or those in charge of the Federal Reserve have said.

Its director, Jerome Powell, said in a recent speech that a rebound in prices is possible in the coming months, but ruled out it reaching worrying levels.

If it happened, he said, the Federal Reserve would “respond patiently” and point out that there would be no immediate rate hike.

Powell’s words show the prevailing belief in Biden’s economic team that the danger to the US economy now is not an inflationary spiral, but an insufficient recovery.

The way it was conceived the danger of inflation appears to have changed

Paul Ashton, a US specialist analyst with Capital Economics consulting firm, points out that “even with all these stimuli, prices may remain on the mediocre path in recent years.”

“Between 2016 and 2019, the US economy showed signs of warming, with a very low unemployment rate, yet inflation was relatively modest.”

In a similar vein, Gita Gopinath, the International Monetary Fund’s chief economist, said she estimated the Biden plan could push prices to a 2.25% year-over-year hike by 2022.

“Nothing to worry about,” says the IMF analyst.

Why inflation is no longer the main concern

In the latter third of the 20th century, memories of the fallout from the 1973 oil crisis were much fresher, when for years the government proved incapable of controlling price increases.

But the price behavior of the past decades has reduced this fear as it has persisted systematically below the Federal Reserve’s 2% target.

In other words, in the eyes of those responsible for shaping economic policies, the problem was more with stimulating economic growth than with slowing prices.

The belief that there is no immediate inflationary threat has been settled on both sides of the political spectrum, and now Republicans and Democrats are in favor of the stimulus.

All of this has encouraged the government to fire with all its artillery after hundreds of thousands of businesses shut down and many Americans lost their jobs due to the coronavirus hit.

So nothing happens?

Every economic policy has its advantages and disadvantages. The Biden government is not the first to face a serious crisis forcing it to set priorities.

The massive stimulus in the United States has helped keep the economy alive, but at the same time they have added to the trade deficit, the difference between what it exports and what it imports, something the Treasury Secretary, Janet, has taken care of. concerns, Yellen, and where China appears to be benefiting.

Ashton explains that “many services, such as bars and restaurants, are still closed and not too many imported products are consumed, while the electronic products that many have bought for telecommuting are mostly from Asia.”

It’s not the only risk. Ashton points out that if equity continues to rise, “we could witness the start of a bubble” in the markets.

But then he asks, “What’s the alternative to the Federal Reserve? Increase interest rates and lead to much higher unemployment? “

Yellen, a member of a generation of American economists plagued by runaway inflation in the 1970s, made his point clear in an interview with CNN.

“I have been studying inflation for years and have been concerned about inflation, but we are facing a huge economic challenge and tremendous suffering in the country. We have to face that. That is the greatest risk ”.