In 2008, we were introduced to a new government policy tool by then Treasury Secretary Hank Paulson called the “bazooka”. Hank’s colorful metaphor referred to creating a government pool of money available to shore up financial companies to avoid market panic. The point of the bazooka was to have it, load it and not use it. It was meant to keep people from panicking and thus avoid the downside of fire sales and illiquidity. The bazooka became the TARP program. This program distributed about $400 billion in preferred capital and recovered almost all of it in repayments.
The TARP program supported banks, insurers and the housing GSEs, but did not bail out consumers directly. Many in the middle class had to muddle through their underwater mortgages and this sapped consumer demand for ten years. With the middle class mired in debt, there was little potential for inflation and none appeared.
The 2020 Bazooka
Fast forward to 2020, and the US government has deployed its bazooka again. This time, it is aimed straight into consumers and fired repeatedly. The Cares Act in March 2020, the Consolidated Appropriations Act of December 2020 and the America Rescue Plan of March 2021 are a stimulus trifecta with more than $4 trillion of combined appropriations. These monies were fed into the economy through direct payments, the Paycheck Protection Program, State grants, hospital grants, child tax credits, enhanced unemployment and the list goes on.
The appropriations have done their job supporting people and businesses, and aggregate demand has been stimulated. So much so that supply chains, weakened by the effects of COVID and trade barriers, cannot handle demand. Within the United States there are too few willing workers to meet the demand for labor. The classic definition of inflation is too few goods and services being chased by too much money.
The supply-demand imbalance is going to last long enough it may become a cycle. Businesses are making more money than ever because of increased consumer spending, but they cannot hire for growth. Labor intensive companies that rely on low cost workers such as restaurants, delivery companies and warehouses have already implemented aggressive raises to attract people. During our recent conversations with bankers, we learned that they are having their usually stable workforce poached, forcing them to increase wage scales. The unusually high quit rate combined with more than 10 million job openings fits the narrative of a highly competitive market for workers.
Inflation and Policy
The United States has entered a period where inflationary conditions exist and is likely to continue to exist. There is a political will to add more stimulus through the recently passed Infrastructure Bill and the still likely American Families Plan (another $1.5-$2 trillion over ten years). The Federal Reserve has emphasized the second half of its dual mandate of supporting full employment, which is allowing generous monetary support to remain alongside the fiscal stimulus.
The American economy has amazing financial fire power, but there is no free lunch. Inflation reflects policy, and there is little to suggest policy is going to change anytime soon.
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See more on Hank Paulson’s “Bazooka” at the Economist.