Moneybeat – A receipt for inflation?


MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Financial analyst and advisor David Bahnsen joins us for our weekly conversation. David, good morning to you.

DAVID BAHNSEN, GUEST: Good morning, Nick. Good to be with you.

EICHER: Let’s talk about the Federal Reserve and interest rates. David, we hear that the central bank is content to stand pat with essentially zero interest. The Fed chairman—Jay Powell—keeps assuring us that the government can just keep spending and spending borrowed money because the debt is serviceable. We can afford our debt service because debt is inexpensive. But I keep reading we’re in danger of an explosion of inflation and you’ve said that’s not the real issue. Why, though, do we continue hearing about the threat of inflation?

BAHNSEN: Well, we continue to hear about inflation because when you’re a hammer, everything looks like a nail. And the people who are worried about inflation have been worried about inflation since 1974. And I think that it’s totally understandable. I think inflation’s a very easy thing to understand. It doesn’t require a lot of complexity or nuance, but it just simply misses some important economic realities, which are themselves very negative. And that is that you can’t get inflation when a bunch of money that has been printed is not circulating throughout the economy.

The reason that I do not believe we’re going to have inflation is a negative reason. I’m not saying it is a positive thing. I’m saying it as a Japan-like condition that because of excessive government debt there is downward pressure on bond yields because of the crowding out of the private sector. And that we have pulled forward a lot of future growth into the present and that we now have kind of forced ourselves in a negative feedback loop that creates lower growth, slower growth—not inflation. And this has been the precedent for 30 plus years in Japan, in the United States, in the European Union. They’re facing disinflationary pressures. 

So, the notion of the Fed adding a lot of money to the balance sheets, a lot of people have a hard time understanding what is different about that versus just printing money and dropping it out of a helicopter. But it is very different. And I don’t like to bore people with these economic differences, but I do like to get the conclusions right. And the conclusion is that the fiscal side, the congressional side, the Treasury side, the governmental side and then the Fed and monetary side are both in cahoots together to try to attention a lot of the problems we have in our economic life. And the way they’re to attention those things is with a policy that creates ongoing debt deflation. And I believe they would create inflation in a second if they could. It is not for lack of trying. I just simply they can do it and my proof of that is the entire last generation.

EICHER: And so you’re saying that the effect is poisonous in a way, but it’s a different kind of poison than inflation.

EICHER: That’s exactly what I’m saying. A similar analogy I use is with weather. I say, just because I’m predicting a hurricane and not an earthquake does not mean that I’m predicting something positive. But I think that with inflation, it allows people to understand it and so they can go to a conclusion that’s a little bit simpler and a little bit more historically familiar because we experienced inflation in our country in the 1970s. 

But the difference is that the debt-to-GDP ratio has gone so much higher and people are understandably—including myself—incredibly distraught over 120-130 percent debt-to-GDP, getting very close to our post-World War II levels we had in our country. And I think we’re going to blow through it. I think we’re going to be at 160-170 percent debt-to-GDP. 

Japan has a 250-260 percent debt-to-GDP. And they have zero percent interest rates. They’ve had zero percent inflation. The problem is not high interest rates and high inflation. The problem is they’ve had no growth. They had low, no, or slow growth for 30 years.

Now, we are not Japan. We have a better demography. We have a better population. We have more productivity from our population. However, on the margin, I think America is going to a place where we will underproduce our own capacity for a very long time and I do not like that for my kids or for my future grandkids.

EICHER: OK, so it’s interesting. We used to talk about government programs in the billions, even hundreds of billions. And it was only after you added them all up that you were talking about trillions. 

Now, it seems when we talk about government programs we start in the trillions that we’ll add up to—what?—quadrillions at some point if we keep going.

And so with the infrastructure bill we’re starting to hear about, of course we’re hearing a number with a T in it, not a B in it: $3 trillion. 

Can you talk before we go today about anything at all, David, that might be positive about an infrastructure bill? What would be a good sign that you’d be looking for?

BAHNSEN: Well, again, taking out the fact that we’re doing this with $27 trillion in debt and with over a trillion dollar annual budget deficits, I do believe that — all things being equal — that if the government’s going to spend a trillion dollars on something, I prefer they spend it on rebuilding Laguardia Airport than on giving $1,400 to people who make $100 grand a year. 

And so if there is money that is productively spent in broadband and hard asset repair that produces a useful life out of the asset that then feeds the needs of the country, I think that’s legitimate. That wouldn’t cost $3 trillion. And, by the way, in fairness that $3 trillion we’re talking about is over 10 years, unlike the COVID number which was this huge hit all at once. 

But the devil’s going to be in the details, Nick, and so we have to both see the details of what they want to go about spending and how they want to spend it. The Obama stimulus bill proved to be an almost entirely wasted amount of money as it was really a payback to a lot of municipal employee unions that were political allies of the Obama administration. I don’t think an infrastructure bill has to be entirely wasted. But I do think it largely will be.

EICHER: Alright. We’ll leave it there. David Bahnsen, financial analyst and advisor. Always great to talk with you. Safe travels and thank you very much.

BAHNSEN: Thanks for having me, Nick.


(AP Photo/J. Scott Applewhite) This Nov. 16, 2020, file photo, shows the Federal Reserve in Washington. 

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