Biden Infra bill, Glasgow commitments and Cognitive Dissonance

NFP is over and with solid job addition the prospects for the US economy are looking up. The US Treasury Secretary also tweeted about the jobs report and highlighted?that the current good news on the job front is a testimony to the belief that "bold" fiscal policy works. She writes that the current growth was never a foregone conclusion and was achieved because the Biden administration came out with the American rescue plan. Now Build Back Better (BBB) package will ensure that the US will thrive in the post pandemic world.

BBB package is a trillion dollar spending plan which the Biden administration has come up with to improve US infrastructure and also provide a host of other policy reliefs to the public. The bill has been passed by HOR and next goes to the senate for debate. Let us see one another statement made by Janet Yellen in Glasgow last week. Yellen said that the estimated cost of "net zero" transition is somewhere around 100 to 150 trillion USD over the next three decades. (Just for context , the current world GDP is around 94 trillion USD in 2021.)

Whether BBB or commitment in Cop26, all these commitments of spending need money. The bigger message which the readers need to see here is how these commitments will be funded. Will they be funded by tax increases, austerity on other fronts or will they be funded by borrowing. We have written previously that given the fact that incentive structures for policy makers and economic consequences of their actions, work at different time frames inevitably the path of least resistance is favored. Taxing is tough and austerity is difficult hence most often debt is the way to go because the bill will be footed by some unknown generation in future. We know that for any highly indebted entity inflation is an ally. Inflation reduces the real value of debt, you pay back in dollars which can purchase much lesser real commodities.?

In a world where the sovereign is the most indebted, inflation control policies present a cognitive dissonance. Readers should take a pause here and think about it, this will allow them to see the "transitory versus structural" inflation debate with more clarity. Fed Chief Jerome Powell was right that the supply bottlenecks will solve themselves out but one thing which will not solve itself out is addiction to fiscal profligacy. This reminds me about the famous quote from Indian Carvaka philosophy "Rinam kritva Ghritam Pibet" effectively translating as "Eat well even if you need to take loan for it". We know inflation will take care.