Updated: Jun 22, 2022
I woke yesterday to read that US Treasury Secretary Janet Yellen had in an interview aired the day before said, “I was wrong about the path inflation would take”. Finally, I thought, some honesty!
I was also a tad embarrassed since in yesterday's blog about the late 60s high inflation and the US federal government in 1969 having admitted it had got its fiscal policy wrong, I wrote, "I see little sign of such honesty and humility today which is concerning to say the least." Oops.
Then, I read on...
“There have been unanticipated and large shocks to the economy that have boosted energy and food prices and supply bottlenecks that have affected our economy badly that at the time I didn’t fully understand,” Yellen went on the say. Absolutely nothing about the current fiscal excesses i.e. government expenditure over and above what is considered prudent minus (covid) emergency spending designed to fill holes in private demand.
The chart below is of annualised growth in US federal expenditure. It is not the increase in 12 month expenditure over the previous 12 months but over the 12 months prior to that, then annualised. So, the latest number of 16% is expenditure in the last three quarters of 2021 plus the first quarter of this year, compared with the equivalent period two years earlier, then annualised. I have done this to smooth out, to some degree, the effect of covid-related expenditure, showing that despite the pandemic emergency from an economic perspective having long passed, federal expenditure is still higher - by 15% annualised - than it was pre-covid. This is far above what the economy can handle and has thus been very inflationary. As indeed is evident.
Rather than being reassured by Yellen's apparent mea culpa I am even more concerned than I was before. While yesterday I wrote about a lack of honesty, today I am tempted to write about dishonesty.
P.S. A good friend of mine Alistair commented on yesterday's post, pointing out that the UK government and others too have called the current high inflation a "cost of living crisis" and that this use of terminology is not trivial. By calling it thus, as Alistair says, the government gives the impression that, to fix the problem:
"all that is needed is Government help to pay the higher prices, just as the UK Government is now doing with heating bills. You can't fight a problem of too much money chasing too few goods by giving people more money, and if we have not even reached the stage where we can call the problem what it is, an inflation crisis, we are a million miles away from solving it."
As Alistair suggests, it is essential that governments start being honest about what economies are facing.
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.
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