Growing inflation may be a reality check for Biden's economic policy

By Tom Fowdy
0 Comment(s)Print E-mail, May 14, 2021
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Traders work at the New York Stock Exchange in New York, the United States, May 12, 2021. U.S. stocks tumbled on Wednesday as a key inflation gauge showed higher-than-anticipated price pressures and unnerved investors. [Photo/Xinhua]

America's economy has bounced back from the virus, or at least so it seems. Opening up, combined with a fast vaccine rollout and multiple stimulus bills, have helped the U.S. shake off its COVID-19 woes and achieve 6.4% GDP growth in the first quarter, following a contraction in 2020. The mainstream media have been highly optimistic when covering this, but developments during the past few days have made prospects appear less rosy. 

In line with a surge in the money supply, U.S. inflation has skyrocketed to 2.6%, surpassing expectations and creating fears that interest rates may be raised accordingly, creating a run-on negative impact on markets. Although the U.S. federal reserve has attempted to reassure the public that it will be temporary, there are fears it may persist. It also comes amid a sudden break in the labor market, with new payrolls increasing by only 266,000 jobs last month and unemployment ticking back to 6.1%.

These developments have not derailed the U.S. economic recovery, yet undoubtedly, they have cast doubt upon unrealistic forecasts such as the idea that America would simply "boom" without facing any challenges or future slowdowns. The country still suffers from many lingering economic inequalities and the results of Trump's economic and foreign policies have not yet come to fruition. The next year or so will certainly put the Biden presidency to the test.

The American economy is mostly propelled by two key dynamics: consumerism and the U.S. dollar. The former rests upon the ability of Americans to spend, purchase and thus consume; the latter is a stable currency which continues to dominate global markets and thus enable unlimited financial inflow. Last year, when the United States responded to COVID-19 with widespread lockdowns, it crippled consumerism by curbing retail, services, tourism and related sectors, leading to a surge in unemployment and a contraction in GDP. 

This decline, however, did not cripple the dollar. The U.S. Federal Reserve responded to the crisis and kept markets stable by printing more money and buying unprecedented amounts of bonds, whereas the Trump and Biden presidencies each unleashed stimulus payments amounting to the trillions of dollars. Americans were each given $1,200 stimulus checks and then later given $1,400 with increased unemployment benefits. 

Not surprisingly, as lockdown restrictions waned and the virus abated, U.S. consumerism jumped back quickly and the surge in demand pushed imports of goods from China up to record highs.

However, this bounce back has papered over some structural problems. First, an excessive reliance on stimulus to recuperate the economy as opposed to a "zero COVID" strategy has dramatically increased the money supply above natural levels which in turn has led to intensifying inflation, in both commodities and every day goods. This runs the risk of overheating the economy. The fiscal answer to such a problem is for the Federal Reserve to raise interest rates, which will of course dampen the pace of growth by curbing spending, incentivizing saving and reducing credit by making it more expensive. 

Second, these stimulus payments have unnaturally inflated the incomes of many low-income Americans beyond what they would get in their actual jobs. The abnormal rate of unemployment benefits has made many families think they are better off not working and this has created a labor shortage which is responsible for the poor jobs data last month. This will have a run-on effect on U.S. productivity. 

Third, Trump's China policies, largely continued by Biden, are contributing to the situation. Tariffs on Chinese manufactured goods, despite not stopping a surge in imports, have also likely contributed to increased inflation. Meanwhile, semiconductor export restrictions on companies such as Huawei have created a global shortage due to pandemic buying, which is also hindering supply and pushing up prices. 

In this case, what is happening now is a rude awakening to the problems which America's economy faces. A lot of media coverage have pushed the "America is back" narrative without contemplating existing problems, or the consequences of dramatic government overspending in order to facilitate a quick resuscitation. This might be more aptly described as a "caffeine rush." One can drink a great deal of coffee in order to feel more awake in the short term, but it cannot ultimately offset the absence of sleep in the long run. In this case, it is fairly obvious the sustained pace of U.S. growth will not last forever. An economy can't rely on money that people don't have.

Tom Fowdy is a British political and international relations analyst and a graduate of Durham and Oxford universities. He writes on topics pertaining to China, the DPRK, Britain and the U.S. For more information please visit:

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