Inflation is already rising fast. The jobs market has stalled. Retail sales are flat, stock markets are tanking, and the bond market may not be far behind.
President Biden made a big bet on running the American economy hot in a bid to kickstart a decade of growth and renewal, and finally get real wages moving upwards again. And yet over the last week Bidenomics has already started to unravel.
The President and his team are about to re-learn some hard lessons from the 1970s and 1980s. Other than in exceptional circumstances, when there is a genuine collapse in demand, the government cannot spend its way to higher growth.
All that happens is everyone adjusts to the stimulus, and that cancels out any gains. We are already starting to see that play out. Biden’s ambitions are going to end in spiraling inflation, or a juddering U-turn. With luck, it will be the latter. One thing is already clear: we won’t see a sustained recovery in growth.
There is no questioning the scale of Biden’s spending plans. Biden has launched a spree the likes of which has not been witnessed since Lyndon Johnson’s Great Society and the war in Vietnam, in the 1960s, and arguably not since the wartime economy of the 1940s.
The American Jobs plan will get $2 trillion to fix the country’s roads, railways and bridges. The American Families Plan will get $1.8 trillion to fund childcare and education. Cheques are being mailed to every family earning less than $100,000 a year, while an industrial strategy will get another few hundred billion to rebuild the nation’s manufacturing base.
And that comes on the back of a Trump Administration that, whatever its many flaws, could certainly not be described as frugal. Funded by the Federal Reserve – its balance sheet has already risen from $4 trillion to nearly $8 trillion in the past year alone – the world will be awash with new dollars.
A lot of the spending is starting to look a little wacky. Stimulus cheques are getting mailed around the world regardless of where American citizens or their dependents happen to live. The Washington Post reported one landing in the account of a wealthy woman in London.
While that might help the economy of the British capital, it is, to put it mildly, hard to see what it will do for anyone in Arizona or Alabama. That might be an extreme example. And yet, when the government starts to spray around free money on that scale, it very quickly loses control of where it goes.
Stimulus cheques will simply be banked, while bridges and roads lavishly funded will face years of delays, and massive escalations in costs, and industrial subsidies will be trousered by chancers and opportunists rather than genuine entrepreneurs.
That is far from the worst of it. We won’t even see much of a stimulus. In the hyper-inflationary 1970s, economists came up with the concept of “rational expectations” to explain why Keynesian pump-priming of the economy so often ended up falling flat on its face.
It came in for a lot of ridicule on the left, and it is certainly true that not many of us carry around a perfectly formed econometric model in our heads. But it contained an important kernel of truth. People are not stupid. They can see what is happening. And they start to adjust their behaviour based on what they are witnessing.
We can already see that in action. When the government prints money on the scale it is right now, people suspect there is going to be an upturn in inflation, and everything is going to cost a bit more in a couple of years than it does now.
The response? Staff start to ask for higher wages, and companies start to edge up prices, while they still can. The net result? Inflation starts to take off, and the rise in prices simply cancels out all the extra spending.
Next, when they see spending increase wildly, they anticipate higher taxes and very soon after that higher interest rates as well. The result? They start to curb spending and investment right away, rather than get stuck with mountains of debt they won’t be able to afford once interest rates get up to 4pc or 5pc.
Finally, the stock market anticipates a downturn. We have already seen the early signs of that with sharp falls in most major markets. The result? You get a stimulus cheque for $1,400 but your equity portfolio, and retirement account, is down by $10,000 or $20,000 so you spend less rather than more.
Once again, the rational response to the extra spending simply cancels it out. There is no net gain. In fact, demand falls.
There are exceptional circumstances when governments have to spend more to rescue the economy. We saw that in 2008 and 2009 when credit dried up and companies were starved of cash. But that is not the situation we face now.
The world is awash with cash, and consumers have built up vast savings while they have been locked down for a year. A Keynesian spending splurge is not going to work.
In truth, Bidenomics is already starting to unravel and far faster than most experts anticipated. Right now, it is either going to end in spiralling inflation.
Or as prices accelerate, the jobs and spending fail to materialise, and as bond yields start to climb ahead of a rise in interest rates, there will be sharp, sudden, and dramatic U-turn, and Big Spender Biden will be hastily re-invented as fiscally responsible Uncle Joe.
For the sake of the global economy we should hope it is the latter – but regrettably, we may need to witness 1970s style inflation while those lessons are learned all over again.
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