Is the Economy About to Boil?

 

Arnold Kling blogs:

1. During the pandemic, Americans accumulated a lot of paper wealth, as the government printed paper wealth in the form of bonds and the stock market returned to a state of irrational exuberance. This wealth now hangs over an economy with some supply bottlenecks and an Administration that will exacerbate those bottlenecks. (Ed.:Already there is full employment in the USA - salaries will rise).

2. If spending and inflation do pick up, we are going to find that the Fed’s brake pedal does not work. The Fed can try to raise interest rates by, for example, raising the interest rate that it pays on Fedcoin (digital bank reserves). But higher rates will be politically unpalatable, because the interest bill for the government will be too much to bear.

3. As to the question of “overheating,” I think of inflation in terms of phase changes. Just as water changes properties when it boils, an economy changes properties when it goes from low and steady inflation to high and variable inflation. By the time it has changed phases, it is too late to deal with it using mild measures.

... historians will go back and see that in hindsight signs of overheating were evident by early 2021. The digital currency mania will be seen as emblematic of the distortions caused by excessive creation of paper wealth.