If voted into law the Inflation Reduction Act will ensure more deficit spending, more Federal debt, more taxes, negligible Real GDP growth, low interest rates and high inflation – a recipe for continued Stagflation.
What does stagflation look like? You are living it. The earmarks of stagflation are high inflation, high Federal debt and negligible Real GDP growth.
- Inflation “Reduction” Act: The name is a joke as if it becomes law this pork-filled program will drive inflation higher through government spending and subsidies. Various “green” initiatives (think Solyndra Part II), Obamacare subsidies and other sources of pork will drive the Federal debt level hundreds of billions of dollars higher. The Federal debt stood at $30.5 trillion as of August 1st and there is no scenario where the Federal debt will shrink.
- Low Interest Rates: The Federal Reserve can’t afford to fight inflation as former Fed Chair Paul Volcker did because the Federal Reserve can’t afford to take the Fed Funds Rate to high single-digit percentage territory, much less the double-digit percentage levels Volcker did. To do so would create an interest expense burden that the U.S. Treasury can’t afford. Thus, low interest rates are here to stay (not a surprise). I can’t see the Fed taking the Fed Funds Rate to 4%.
- High Inflation: Continued money printing, government spending and welfare programs (both corporate and individual welfare), ensure that price levels will remain high across the economy. A 2% CPI simply is not in our near-term future. An economic depression may get us there, but that’s it. The dirty little secret of course is that real world inflation is far greater than the reported 9.1%.
- Muted Real GDP: It is difficult to imagine a scenario where the U.S. economy could consistently drive 2-3% Real GDP growth per annum, much less something north of 5%. The U.S. economy is overburdened with debt, suffers from overregulation and is strangled by various welfare programs. Unless the economy is freed from its shackles we better get used to Real GDP that ranges from -1% to 1%, hardly anything to get excited about.