• John Adams

The Biden Administration will Accelerate Stagflation

As the dust settles on the 2020 US election, the world must now come to terms with the full ramifications of the economic agenda of the Biden Administration in light of the world’s largest debt bubble and the unprecedented economic stimulus which was rolled out in 2020.


Overview of the Trump Administration

The Trump presidency, while achieving several important policy objectives during its 4 years in office, did not bless the Biden presidency with strong macroeconomic fundamentals, actually quite the contrary.


In terms of national debt, US Federal Government debt, under the Trump presidency, soared from $US 19.98 trillion at the end of 2016 to $US 26.95 trillion at the end of September 2020 (over $US 6.97 trillion). The greatest accumulation of federal government debt in the history of the United States over a 4-year period[1].


While the Trump Administration attempted to normalise monetary policy by raising official interest rates from 0.65% to 2.4% and shrinking the balance sheet of the US Federal Reserve from $US 4.45 trillion to $US 3.76 trillion over the first 2.5 years of the administration, this was completely reversed in the second half of 2019 with the crisis in the repo market and the onset of the COVID-19 pandemic in 2020.


Moreover, gross external debt under the Trump Administration blew out from $US 18.02 trillion at the end of 2016 to $US 21.31 trillion in September 2020.


The COVID-19 pandemic in particular saw the Trump Administration, US Federal Reserve and

the US Congress adopt the most extreme set of macroeconomic policies in American history.


Official interest rates were slashed to zero, the balance sheet of the US Federal Reserve ballooned out to $US 7.36 trillion by the end of 2020 and in just 9 months from January to September 2020, the US Government accumulated $US 3.75 trillion in additional federal debt.


Economic Stimulus leads to Stagflation

By no means were these extreme policies exclusively implemented by the US Government, but were adopted by governments and central banks across the world in varying degrees.


The prospect of negative economic growth, high unemployment (resulting from the lockdowns and COVID-19 control measures) and rising prices (resulting from unprecedented central bank money printing) led to the June 2020 publication of “Can central banks save the largest bubble in world history”[2].


This article outlines a series of justifications why the world would be experiencing stagflation as a result of the unprecedented economic stimulus deployed in the wake of the declaration that COVID‑19 was a pandemic by the World Health Organisation.


In the Australian context, evidence of stagflation was evident by August 2020 in Australia with negative economic growth, elevated unemployment and underemployment and surging growth in the Australian money supply as measured by “Broad Money”[3].


As was the case with stagflation in the 1970s, the best asset class which performed in this environment was physical gold and silver. Consistent with both economic theory and historical performance, gold and silver had a stellar financial performance for investors who had exposure to both precious metals in both Australian and US dollar terms in 2020.


Their relative performance is outlined in in Table 1 and 2.


Accelerated Stagflation

Looking forward as we progress through 2021, and the early indications are that the Biden Administration will trigger an acceleration of the stagflation which started in 2020 under the presidency of Donald Trump in two important ways.


Method 1 - Additional Stimulus & Spending Commitments


First, the Biden Administration under the guidance of Treasury Secretary Janet Yellen has submitted to the US Congress a massive new stimulus package in the order of $US 1.9 trillion which includes a new round of COVID-19 related stimulus payments (At the time of publication this stimulus package had already passed the United States Senate).


In addition, the Biden Administration is seeking to spend $US 2 trillion over 4 years in a new mammoth spending package dealing with infrastructure, clean energy and climate change.


Such fiscal stimulus and additional policy related spending commitments could push the federal budget deficit for FY20-21 to be equal if not higher than the $US 3.1 trillion incurred in FY19-20 (noting that the US financial year runs from October through to the following September).


Even if the deficit is smaller for FY20-21, what is guaranteed is that US Federal Government Debt will reach a new high in the coming 12 months and will require a significant issuance of new US Government bonds (i.e. US treasuries) at the same time that existing short-term US treasuries will need to be rolled-over.


Thus, additional monetary stimulus in the form of quantitative easing is likely to be required to finance this additional fiscal spending in an attempt to lower bond yields and to keep the interests costs of the US Government within a manageable range.


This is ever more important given that the yield on the 10-year US treasury bond reached its highest closing day level since the start of the COVID-19 pandemic on 5 February 2021 at 1.17%. Record debt and deficits coupled with rising bond yields point to a fiscal disaster as interest costs cannot be managed.


Additional monetary stimulus in the form of Quantitative Easing would see the balance sheet of the US Federal Reserve explode beyond the current $US 7.4 trillion level.


Method 2 – Contracting Economic Supply

Second, the Biden administration has already begun introducing a wave of new regulations which is costing tens of thousands of jobs. This includes:

  • re-joining the Paris climate accord which requires the United States to make drastic and immediate reductions in carbon emissions impacting multiple sectors;

  • the cancellation of major infrastructure projects such as the Keystone XL pipeline;

  • the prohibition of oil and gas fracking on land owned by the US Government; and

  • suspending the further construction of the border wall along the US-Mexico border.

These new regulations coupled with a slew of new federal taxes which are slated for implementation will restrict the supply side of the US economy which will drive up unemployment and prices.


As Biden has already broken multiple campaign promises, it remains unclear as to the full macro and micro consequences of his policies. This uncertainty is going to have significant detrimental implications in generating economic growth.


Early Signs of Accelerated Stagflation

While the Biden Administration has only been in power for less than a month, there are several indications that accelerated stagflation is already manifesting. These indicators include:


  • weak jobs growth – In January 2021, only 49,000 jobs were created in the United States while job losses in December 2020 were revised downwards from 140,000 to 227,000;


  • rising price of oil – the price of oil according to the West Texas Intermediate (which is a critical input to industry and transportation) rose to highest level on 5 February 2021 to $US 57.07 per barrel – the highest since mid-January 2020;


  • rising inflation expectations – according to the St Louis Federal Reserve’s 5-Year Forward Inflation Expectations Rate[4], inflation expectations rose to 2.14% on 5 February 2021, the highest rate since December 2018[5]; and


  • non-energy commodity prices, as part of a bucket of 63 commodities, rose by 16% in December 2020 relative to 12 months prior in December 2019, representing the fastest rise in non-energy commodity prices since 2011[6]; and


  • rising bond yields – in inflationary environments the real return of government bonds decreases and this generally triggers a sell off of government bonds resulting in the lowering of bond prices and rising bond yields. As of 5 February 2021, the yield on 10‑year and 30‑year US Government bonds reached the highest closing day rates since the start of COVID-19 at 1.17% and 1.977% respectively.


It is important to note that accelerated stagflation forces triggered by the Biden Administration would have been in train for at least 6 to 8 weeks prior to the inauguration of President Biden given that economic agents and financial markets would have altered their expectations once they accepted the results of the contested 2020 election.


Similar to the Carter Administration

Importantly, the above phenomena should come as no surprise to those who have studied the stagflation of the 1970s. The phenomena of stagflation commenced from 1974 to 1976 under the Nixon and Ford administrations both who were republicans and was exacerbated by President Carter from 1977 to 1980.


Under the Nixon and Ford Administrations, interest rates were lowered from 13% in July 1974 to 4.75% in November 1976 whereas federal budget deficits exploded in size during 1975 and 1976 under President Ford and were continued under President Carter.


As a result, annualised inflation sky rocketed from 4.75% in 1977 to 14% in 1980 and real interest rates became severely negative. Under these conditions, the price of gold and silver skyrocketed to all-time highs increasing in price by hundreds of percent.


Relative to other asset classes, gold and silver were the strongest financial performers during this period.


Implications for the Global Economy

Accelerated stagflation in the United States has significant implications not only the US economy, but also the global economy given that the United States is the epi-centre of the financial system and that US economy remains the largest economy in the world.


These implications include:

  • continued expansionary monetary stimulus is likely to lead to a weaker US dollar impacting trade and investment flows;


  • rising US Government bond yields, such as the 10-year treasury yield, will lead to rising funding costs for both US banks and corporations as well as international entities who rely on funding from the US credit market; and


  • rising precious metal and commodity prices, which are set largely in the US (such as oil, food or precious metals (e.g. gold and silver)), will lead to a boom in commodity rich countries such as OPEC countries, Canada, Australia and Brazil; and


  • rising global oil prices will lead to cost-push inflation for oil importing countries and will impact the cashflow of households through rising fuel prices.


Conclusion

In 2020, both the United States and the global economy saw the emergence of stagflation as a result of the unprecedented economic stimulus response to the COVID-19 pandemic. The impact of these policy responses will take several years to play out.


From all early indications, the economic and regulatory policies of the Biden Administration will accelerate the stagflation phenomenon through both expanding economic stimulus and restricting economic supply through economically harmful laws and regulations.


By the historical precedent of the 1970s, the price of gold and silver should rise strongly in response as investors seek to protect their purchasing power from rising inflation.


Investors who take early and prudent action in readjusting their financial portfolio such as accumulating gold and silver to protect their purchasing power will be able to mitigate the adverse impacts of stagflation.


Those who do not do so are likely to experience compressed levels of real disposable income and thus falling living standards.

[1] At the time of publishing this article, the final US Government debt figure for the end of 2020 is yet to be released. [2] https://www.adamseconomics.com/post/can-central-banks-save-the-largest-debt-bubble-in-world-history [3] This evidence was presented by on the In the Interests of the People YouTube channel on 3 August 2020 in an episode entitled “Stagflation Is Occurring Before Your Very Eyes”. See the following link: https://www.youtube.com/watch?v=NeP3ZR81fi8&t=19s [4] https://fred.stlouisfed.org/series/T5YIFR [5] Note that during December 2018, the Federal Open Market Committee was still in a tightening interest rate cycle meaning that inflation expectations was declining from its peak of 2.35% in February 2018. [6] https://www.reuters.com/article/us-global-commodities-kemp-idUSKBN29X28O

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