Taps Coogan – January 22nd, 2021

The accelerating pace of US stimulus spending is staggering. Not a day had passed after the $900 billion stimulus bill was signed into law before talks of increasing it set in. The $1.9 trillion manifestation of that sentiment, a devil’s bargain whereby Congress licenses the official return of pork by sending voters ever-larger checks, hasn’t even been finalized and talk is already starting on a $2 trillion infrastructure bill. Then there is the Medicare expansion, student debt forgiveness, ‘green’ spending, etc…

With the realization that the deficit in 2021 may actually be bigger than 2020, the pressure is on at the Fed to monetize ever larger amounts of debt. Along those lines, Mohamed El-Erian, Allianz chief economic advisor, recently spoke with CNBC to warn that if these stimulus bill manifest, the Fed is going to have an increasingly hard time monetizing the amounts of debt necessary to keep rates pinned to the floor without sparking inflation fears.

El-Erian notes:

“If, and I stress if…, we get the fiscal package, and we get a second fiscal package in February, which we should, and the Fed continues, and some of the excessive income relative to trend consumption comes into the economy, you’re looking at 20%-25% of GDP in terms of injection. That will raise inflationary concerns… I think that what you’ll see central banks ultimately do is change the pattern of what they buy in order to try to repress yields, but it’s going to get a lot harder if all of this money materializes…”

Tax payers, not just the rich ones, and anyone who is vulnerable to inflation, ought to be shaking in their boots.

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