Will massive deficit / debt spending lead to inflation?

 

 

Let us assume (I hate that word) that the democratic Congress passes something close to Biden's Administration stimulus proposal of staggering $1.9 trillion. If that happens it will boost the so-called cumulative amount of US fiscal stimulus in the past 12 months to ~$5 trillion in deficit/debt spending [three massive tranches $2.2 trillion, $900 billion, and $1.9 trillion]; in the past year, nominal GDP totaled ~$21 trillion, so the cumulative injection of fiscal stimulus amounts to almost a whopping 25% (one reason why GDP numbers have soared as the GDP equation used GDP = C + I + G + (X – M)  equals private consumption + gross investment + government investment + government spending + (exports – imports).  No other such massive deficit spending in modern times comes close to what we are seeing (and to top it off there is another $2.0 - $2.2 trillion in infrastructure spending expected as well,) especially during peace times.

The CBO published a report back in 2010 on the military costs of significant wars.

• The military war costs of World War I...it amounted to 13.6% of GDP.
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• World War II ...it amounted to 35.8% of GDP.

So, the current massive deficit/debt spending/stimulus falls somewhere in the middle of the two World Wars.

During the previous World Wars, activity in the private sector was significantly depressed. That is not the case today. The housing sector thanks to the FED’s massive rate drop is booming, with housing starts at the highest levels in over 15 years (since the last housing bubble became inflated), and prices are rising double-digit to new record levels. At the same time, the manufacturing sector is experiencing a proverbial mini-boom in orders and production. Given the massive scale of fiscal stimulus deficit/debt spending, one would expect the FED to be contemplating raising interest rates. But not this manipulative interventionist FED, this FED is using the same playbook from the TBTF-banker led Great Financial Recession, providing unneeded stimulus to the red-hot housing market, and inflating other assets to Hindenburg proportions! So, what is their economic and financial endgame? It is hard to see anything but another contrived mega “boom-bust” situation playing out with fast manipulative (deficit/debt) spending growth and rising market interest rates this year and into early 2022, followed by a mega bubble bursting (like the dot-com bubble) in late 2022 into 2023 when the fiscal shit storms hits, and the free-flowing stimulus/support dries up. The proverbial FED and government sugar-high today is unprecedented, raising the odds of a very-nasty hard landing.