The Federal Reserve is going to have to monetize the national debt to finance it, Breitbart Economics Editor John Carney said in an interview Wednesday on Larry Kudlow’s eponymously named Fox Business show.
The Congressional Budget Office (CBO) said on Wednesday that the United States will add $22 trillion in new debt over the next decade, nearly doubling the federal debt. Kudlow asked Carney if the Federal Reserve will have to monetize the debt to finance this explosion in government spending.
“Of course, they’re going to monetize it,” Carney said. “Look, why we got into this trouble was Joe Biden’s decision to spend that extra 1.9 trillion. We would have had inflation coming out of COVID, but that really sparked it. Kicked it into high gear. This is a recipe for inflation right here. The Fed is going to have to monetize it … if the interest rates are going to be as low as the CBO thinks it’s going to be. So, that means that we’re going to have much higher inflation. Their projections are in some ways just completely unrealistic because they don’t see the dynamics of inflation rising again.”
Joe Lavorgna, the former chief economist for the Trump White House’s National Economic Council, placed the blame for these ballooning deficits on the Federal Reserve, which he said, has “allowed the government to grow at a much faster rate and much bigger rate [by] keeping interest rates down.”
“While we’ve got inflation now, what we had over the past decade—two decades—was massive inflation of financial assets and real assets,” Lavorgna explained.
He warned that the current “massive deficits and spending will depress economic activity, which depresses wages”— meaning that “middle and lower income households will suffer because they don’t hold the most assets.”
The discussion turned to the latest economic data from the Commerce Department, all of which indicate that the long-expected recession might be further off than anticipated. As Carney noted in Wednesday’s Breitbart Business Digest:
The sales growth was broad-based. Not one of the categories of retailers tracked by the Department of Commerce saw a decline in sales on a seasonally adjusted basis. Indeed, sales rose for every category with the exception of gas stations. There were big gains in autos, furniture, electronics and appliances, general merchandise, department stores, and clothing stores.
[…]
There is no sign of a soft or hard landing in the data. In fact, it all suggests that demand remains strong. Even demand for consumer goods, which was supposed to be declining, seems to be on the uptick. The data this week — including the acceleration of consumer prices — all scream “no landing.”
The Wall Street forecasters were proven wrong again about the January retail numbers because they have not factored in the post-pandemic new normal of early holiday shopping, Carney explained to Kudlow.
“Seasonal adjustments have thrown things off for three years in a row,” he said. “Now we’ve had some upside surprises in January. Why is that? Because when you do the seasonal adjustment, that assumes that shopping goes off a cliff in January, and it doesn’t do that anymore — mostly because people aren’t broke in January like they used to be because they do their shopping in October.”
This is a theme Carney has repeated explained in his newsletter:
This was the third year in a row in which the January retail sales figures came in higher than expected. As we wrote on Monday, Wall Street’s analysts have not caught up with the change in shopping habits that pulled holiday sales forward into September and October. This leaves them overestimating sales in November and December and underestimating sales in January.
There’s also a problem with the seasonal adjustments. These are based on pre-pandemic shopping patterns that assume big surges in sales in November and December and a huge decline in January. Sales still do rise in December; but because they do not rise by as much as they once did, the seasonal adjustments reads this as a decline. Similarly, sales fall in January, but the seasonal adjustment reads it as an increase.
All of this means inflation isn’t going anywhere anytime soon.
Lavorgna quipped to Kudlow, “Don’t worry, Larry, the recession will take care of the inflation. That’s basically the end of it.”
Again, Lavorgna pointed to the Federal Reserve’s complicity in compounding this problem because Fed officials waited “way too long at raising rates and now they’re going way too quickly at lifting. So, it’s a classic boom and bust cycle. But, if you have a recession, prices will moderate.”
Carney summed up what all of this means for the Fed’s inflation fight and the possibility of a recession.
“I looked at these numbers combined with the employment number—half a million jobs in January. We saw an 8.7 percent rise in Social Security benefits because of the cost of living adjustments. And so, people had a lot more money in January. I don’t see that going away,” he said. “So, I’m worried that actually the Fed is going to have to go a lot higher than the five and a quarter [rate hike] people have been expecting. I’m looking at five and a half to 6 percent. I think they have to keep raising unless we get a bad number sometime between now and this summer.”
The bottom line, as Carney explained in his Breitbart Business Digest, is “ no recession now or in the near future likely means more persistent inflation and a worse recession later.”
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