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Q3 Thoughts

10/29/2021

For the first two quarters of this year, our economy was growing at a solid 6% annual rate.  However, it slowed to a mere 2% rate in the third quarter.  The drop from 6.7% in Q2 to only 2% in Q3 is a dramatic drop in demand.  Economists blamed the emergence of the Delta variant, the supply chain crisis, and attention-fatigue with the political circus.  Yet, a recent survey showed only 18% considered the drop in demand as a problem.  44% considered inflation as the biggest problem.

According to Monetarists, inflation results when money-supply increases faster than productivity.  According to Keynesians, inflation results when demand is greater than supply.  According to Supply-siders, inflation results when taxes & regulations cripple supply production.  However, every economist believes inflation is more difficult to control, once inflationary expectations becomes set or rigid.

Those old enough to remember the 1970’s are “once burnt, twice shy.”  Every uptick in inflation becomes proof-positive that inflation is out of control for many years to come.  However, that requires a belief that we will not learn to live with the remaining Covid strains.  The belief that inflation is here to stay also requires a belief that capitalism cannot fix the supply chain problems within a reasonable time.

The impact of Washington has increased dramatically.  They wisely opened the flood gates on deficit spending, which prevented a depression.  This sudden increase in money supply is already starting to drain off, easing inflationary pressure.  Then Congress wisely allocated another $1.2 trillion in deficit spending for physical infrastructure improvement, which has not been spent.  When spent, this increase in money supply will increase productivity, further easing inflationary pressure.  But, the third leg of this stool is another $1.75 trillion or so for “social infrastructure.”  While I support the goals of this bill, it looks like a long-term source of inflation, which justifies more rigid inflationary expectations.

Like many things, inflation is a two-edged sword.  The 1.2% jump in the Employment Cost Index shows increased negotiating strength for labor, which is overdue.  Inflation is also a long-term solution to our long-term national debt, which is approaching $20 trillion.  At least, that makes Modern Monetary Theorists happy.

Regardless, this ain’t your Daddy’s inflation . . . at least, not yet!

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