Yellen vs. Dorsey – Who’s Right?

Janet Yellen, Secretary of the Treasury says that the escalating prices we’ve experienced lately are a temporary blip caused by the reopening of the economy.   Jerome Powell, Chairman of the Fed, more of less agrees but tends to hedge a bit more.  Jack Dorsey, multi-billionaire and CEO of Twitter, recently tweeted that he thinks we are headed for “hyperinflation”.  His tweet has created quite a stir. 

Both Yellen and Powell would like people to believe that inflation is temporary.  If many were to think we are headed for a period of hyperinflation that would trigger accelerated buying and hoarding, (even more than toilet paper) making the situation worse. Likewise, Dorsey’s prediction of hyperinflation may be based on no more than an attempt to generate more Twitter traffic.

There’s also been some quibbling about the meaning of the term “hyperinflation”.  That term makes us think of the Weimar Republic in the 1920’s when Germans needed a wheelbarrow of cash to buy a loaf of bread or the recent experience in Venezuela where in 2021 the inflation rate exceeds 5000%.  Currency becomes worthless.  Savings are wiped out. 

Is that what Dorsey is predicting?  My wild guess is that he’s thinking more in terms of double-digit inflation, but who knows?

And, who’s right, Dorsey or Yellen?

Many aspects of the current economic situation point to more price pressure.  For example,

Higher oil prices increase costs for businesses who then pass on the higher costs to their customers.  Exploration and drilling have declined in the U.S. over the past 2 years because of COVID and because of new regulations preventing drilling on Federal land and the northern tier of Alaska.  Oil companies have also scaled back because of the anti-fossil-fuel political climate. Recently oil companies have increased exploration and drilling so perhaps more supply will be available in 6-12 months, causing a reduction in gasoline and heating prices. On the other hand, OPEC and Russia are still limiting supply. 

Supply shortages of imported goods will also cause inflated prices to continue for at least a year.  The ports of LA and Long Beach will not catch up on the backlog of cargo ships for about 12 months.  Supply shortages of electronics will cause computer and other consumer electronic prices to remain high. 

Labor shortages cause wages to increase.  Increased labor costs get passed through to customers who feel the budget pinch and request higher wages of their employers.  It can spiral.

Higher real estate prices are pro inflationary.  If workers cannot afford housing, that could cause labor shortages in certain areas or longer commutes from lower cost areas. 

Increasing demand for certain goods and services as the economy opens is also inflationary. 

The government has the challenge of making sure these things don’t spiral out of control.  Higher costs lead to higher prices lead to greater wage demands lead to higher costs, etc.

The economic levers that government usually uses to control inflation include:

Higher taxes to reduce spending and therefore prices.  The higher taxes are coming.   They are supposed to be only on the very wealthy so that may have a minimal effect on consumer spending and therefore, prices.

Higher interest rates.  The Fed can cause interest rates to increase by increasing the federal funds rate (short term) and adjusting open market operations (long term).  Higher interest rates will cause less business and consumer spending which will reduce spending and investing.  On the other hand, the Sec. of the Treasury who holds some sway with the Fed does not want to see higher interest rates because that will make it more expensive to finance the huge Federal debt.  Therefore, significant increases in interest rates (initiated by the Fed) are unlikely.

Reduced government spending.  Generally, a key tool the government uses to reduce price inflation is to reduce deficit spending.  However, currently the Government is doing exactly the opposite and planning even more spending.    The effect of more spending can be offset with higher taxes, but history shows this is rarely as effective as expected.

So, is Dorsey right?   

Unless the Government changes its policies or something happens to change the supply-demand situation in markets, the deck is stacked on the side of more inflation, maybe not hyperinflation, but more than we want.

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