Is There a Looming Inflation Spike?



Will massive stimulus spending spike inflation?

The chaos and legal disputes in the wake of the presidential election have nearly eclipsed the earlier debate on additional coronavirus economic stimulus payments. As a society, these are uncertain times. Economically we face the prospects of continued GDP growth, a recession,  and most importantly the true cost of economic stimulus and trillions of dollars of debt incurred from the pandemic. First, the Federal Reserve slashed rates to zero to one-quarter of a percent. Next came the PPP or the Paycheck Protection Program which was allocated approximately $349 billion of the $2.2 trillion Coronavirus Aid and Relief & Economic Security Act or CARES Act. While the sheer amount of money sloshing around in the gas tank of our economy is frightening the U.S. fiscal stimulus is a mere fraction of what other developed nations have paid with the U.S. stimulus representing only 13% of our GDP, compared to 33% for Germany, and 42% of Japan’s gross domestic product. However, the sheer size of our GDP when compared to other developed countries should be considered.

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The Positive Realist November 10, 2020 at 10:42 am

While not a major concern in this Presidential election, inflation is of real concern especially to the Federal Reserve in the era of massive stimulus. If inflation takes off through 1) a lower valued US Dollar, 2) higher prices for domestic goods and services, 3) higher interest on US national debt due to unfavorable market conditions especially on the 30% of the debt owed to such foreign nations as the People’s Republic of China, and Japan, 4) generally lower concern about the lack of accountability for the use of taxpayer dollars, and 5) other numerous causes. Yet because of stimulus, there is still a very real concern about stagflation. Stagflation is a condition that exists when a relatively slow economy with significant unemployment is combined with significant inflation.

It seems even the bulwark against growing debt and deficit spending, the Grand Old Party, is no longer the bulwark it once was since the death of John McCain. It seems the only way we try to get out of problems nowadays is to spend our way out. It seems prudent spending is now the domain of the less powerful.

If forbearance ends in massive foreclosures due to borrowers not being able to afford their restructured debt, potential HECM borrowers could see substantial drops in home values resulting in lower principal limits for most of, if not all of, 2021. In that case and if commission rates do not recover from the loss of LIBOR, HECM originators could experience significantly lower commissions in 2021.

Within days both the annual report to Congress and the annual actuarial review conducted from HUD’s independent actuaries for the fiscal year ended September 30, 2020 should be released showing likely economic conditions for HECMs for fiscal 2021. It should be pointed out that even the OMB during the Obama Administration had real problems with the optimistic bias of HUD in its fiscal 2010 budget projections but even the OMB was optimistic.

Following the adage of Zig Ziglar, we should: “Expect the best. Prepare for the worst.”

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