2H21: Historic Rebound or Onset of Stagflation

by | Jul 2, 2021 | 0 comments

It appears the U.S. economy has two very distinct and diametrically opposed directions in which to go: an economic recovery the likes of which will be historic or the onset of an inflationary phase with little or no growth. This is very unusual, yet it is the position we find ourselves in.

                                  Worst Case Scenario for U.S. Economy

 

Most economists believe 2H growth will exceed 10% and continue to be strong throughout 2022. This supercharged growth is principally due to Congress approving a $1.9 trillion fiscal package on top of an earlier $900 billion package enacted in late 2020. An additional  $1-3+ trillion for infrastructure development is awaiting Congressional approval.

Many prognosticators expect the economy to return to its pre-COVID level in 2022. Job growth has been steady and there is still a huge number of unfilled jobs. The federally funded unemployment benefits, scheduled to cease in September, will force many to re-enter the workforce and fill some of the employment gap. All of this government stimulus, a Federal Reserve willing to have a Fed Funds rate below the inflation rate, a pending infrastructure spending bill in the trillions, and an end to the negative impact of the pandemic point to an inflationary scenario.

Many workers went virtual during COVID

But, with the good comes the ugly. The Producer Price Index rose a full 1% in March. A solid indication of rising prices. Most energy experts believe oil will be near $100/barrel by the 4th quarter – equating to an average gasoline price of $4/gallon. These are just two examples of creeping inflation in the system.

It’s no secret that throughout the world government-reported inflation stats are inaccurate – almost always erring on the side of understating inflation (and that goes for the U.S. as well). As we noted earlier, currently the ‘reported’ inflation rate (5% in May) is much higher than the interest rate (Fed Funds rate is only 0.25%). Meaning that it pays to borrow money and speculate by purchasing assets: real estate, stocks, commodities, even cryptocurrencies. This speculation forces prices for these finite assets even higher and inflation starts to spiral as the relative value of the dollar decreases.

The Federal debt was 127% of GDP in the 1st quarter of this year. With the anticipated growth in the 2nd Half of the year, this Debt-to-Output is forecasted to come down. However, the Biden Administration and Democratic House are contemplating a $3+ trillion infrastructure spending bill. This is not sustainable, particularly in a rising interest rate environment that the Fed will be forced into.

The Solution

Higher Taxes! All of the COVID stimulus and the pending infrastructure spending will all go back from where it came – the Federal government. Taxes would have to rise at all income levels and higher tax rates would be assessed in many things, such as the death tax.

Summary

Higher taxes, rising prices for commodities, food, energy, health care, insurance, and a spend-binged government puts the average consumer in the lurch. It’s the old mushroom farm scenario: keep them in the dark and very once-in-a-while throw some crap on them.

I am skeptical about the rosy future many economists are predicting. Yes, there will be good, robust growth in the 2nd half of this year – but, I believe, it will be short-lived. Furthermore, if the Fed waits too long to increase interest rates the ecomony will experience not runaway inflation but its far worse sibling – stagflation.

4M Performance

By Jim Lavorato

Jim Lavorato is the founder of 4M Performance which is designed to assist businesses to survive and thrive in these uncertain times. Jim launched an entertainment-related company in 1988. He was at the forefront in cinema technology and helped spearhead the movie industry's transition to digital presentation and distribution. He also co-founded the Arboreal Group, an environmental consultancy. He has published articles on the motion picture and media industries and is a contributing editor for ScreenTrade magazine and writes a blog "Cinema Mucho Gusto". He is a certified SCORE Mentor in the SCORE Greater Phoenix Chapter and lives in Scottsdale, AZ. Learn more about Jim in his "About" page.

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