A few days ago, the Biden administration proposed a $1.9 trillion economic recovery plan was approved, followed by a larger stimulus plan, and it is reported that the new plan may use $4 trillion.
Reuters reported on May 5 that the London-based Economist Intelligence Unit released a report saying that only half of the $4 trillion infrastructure and jobs stimulus plan proposed by President Joe Biden may eventually be approved, or $2 trillion.
According to the report, Biden’s economic stimulus package is massive, and whether it will lead to soaring inflation or unsustainable public debt has become the focus of attention. Although only part of the stimulus package is expected to be passed, these risks should not be taken lightly.
According to the report, the U.S. inflation risk is expected to be greater than in the aftermath of the global financial tsunami in 2007-08.
The Economist Intelligence Unit expects the U.S. public debt to gross domestic product (GDP) ratio to rise from 100 percent last year to an average of 105 percent per year in 2021-22.
The report also said that if U.S. inflation increases faster than expected, it will remain a major risk affecting its forecast.
Recently, members of the U.S. Congress debated the pros and cons of the Biden administration’s spending proposals, with many Republican lawmakers saying the proposals are too costly and carry the risk of inflation.
U.S. consumer prices rose 2.6 percent year-over-year in March, expanding from February’s 1.7 percent gain. Meanwhile, long-term U.S. Treasury yields climbed on signs of a strong economy and market expectations that the Federal Reserve will have to start raising interest rates earlier than officials have hinted.
Some economists, including former Treasury Secretary Larry Summers, have warned that a surge in federal spending this year due to the $1.9 trillion new crown bailout enacted in March could trigger invidious inflation.
However, U.S. Treasury Secretary Yellen said she does not share Summers’ view that the bailout package will overheat the economy. She expects to see some upward price pressure over the next six months, largely because of possible supply chain bottlenecks, higher energy prices and near-term labor demand as normal economic activity resumes.
Speaking at a summit hosted by The Wall Street Journal, Yellen said, “We’re watching this closely, and we have some tools to respond if there is an overheating economy.”
She stated, “However, I really think a bailout package is necessary to make sure that the epidemic doesn’t permanently scar workers and families in our economy and to make sure that we can get back on track quickly.”
The Wall Street Journal reports that Yellen also downplayed concerns that Biden’s two new economic plans would trigger runaway inflation. One of the plans focuses on infrastructure spending and the other on households. She said the spending, while large, would be spread evenly over eight to 10 years. The Biden administration has also proposed tax increases on corporations and the wealthy, which officials say would pay for the plans over 15 years.
Leading Chinese economist Shi Hanbing wrote on May 5 that the current rate of price increases in the United States is gradually waking up politicians. The U.S. Department of Labor released the U.S. Producer Price Index (PPI) for March, the largest year-over-year increase since September 2011, and the CPI also rose 2.6 percent year-over-year. This momentum is still accelerating. Recently, some have begun to compare the current U.S. inflation to the 1970s. If we allow inflation to rise and do nothing, it is bound to lead to serious consequences, and in time, I am afraid we will have to passively adopt a more aggressive strategy of raising interest rates to quell the inflationary fire.
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