News: Could $5 trillion overcook the economy? — Many Dems reject inflation fears

Thursday, March 25, 2021

Could $5 trillion overcook the economy? — Many Dems reject inflation fears — SPACs lose altitude

Mar 25, 2021

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Quick Fix

Could $5 trillion over cook the economy? — I write this morning about President Biden's plans for a fresh $3 trillion federal spending on top of the nearly $2 trillion in stimulus just pumped into an already growing economy. Even some supporters of the effort are watching nervously for unintended consequences on the road to getting a deal.

The unprecedented flood of federal dollars — should it materialize — is starting to worry a contingent of Democrats, economists and investors who fear that at least some of the long-held economic views around federal spending will reassert themselves and trigger painful costs.

Among them is the long-held fear that massive spending — coupled with persistent easy-money policies from the Federal Reserve — in an already firming economy could spark a wave of inflation, a disorienting spike in interest rates and a painful pullback in a broad range of currently high-flying assets, from home prices to tech stocks to the newer fad of "non-fungible tokens" and Special Purpose Acquisition Companies (SPACs) that saw a flood of investor interest in recent months.

Rep. Jim Himes (D-Conn.) tells me: "History shows us that when money is effectively free, crazy things happen … And we are starting to see lots of crazy things in the equity market, the high-yield bond market, SPACs and tokens. Oftentimes this kind of thing does not end well at all."

Himes and other Democrats are quick to note that previous warnings about the need for fiscal restraint proved hollow and severely limited the effectiveness of President Barack Obama's economic rescue efforts following the 2008 financial crisis.

And every progressives favorite former Treasury secretary Larry Summers tells me: "My concern is that this is taking us further into substantial risk territory …

"We either do what we did during Vietnam, which is explain inflation away and attribute it to transitory factors until we wake up one morning and we have 4 percent inflation expectations, or we aggressively try to contain it like we did after the Korean War and we have a recession. Both of those are substantial risks along with the risks to the dollar and of asset price bubbles."

White House pushes back — Jared Bernstein, a member of Biden's White Council of Economic Advisers, told me the administration was not at all "dismissive" of concerns about inflation or overheating the economy – but that on balance they view the risks of doing too little as far greater than doing too much.

He suggested that some significant portion of the $3 trillion would be offset by proposed increases to corporate taxes and individual rates on the wealthy. "We recognize that corporations and the wealthy have disproportionately benefited from growth for many years now including over the pandemic …

"Overall, this is a very concentrated package that hits a critical set of goals including knocking out the virus and putting it behind us and then an investment agenda to push back on structural inequalities that have long persisted and doing so while including some much needed equity and fairness into the tax code."

GOOD THURSDAY MORNING — Email me on bwhite@politico.com and follow me on Twitter @morningmoneyben. Email Aubree Eliza Weaver on aweaver@politico.com and follow her on Twitter @AubreeEWeaver.

Driving the Day

Biden holds his first full-dress press conference as president this afternoon. He also meets virtually with the European Council during its summit to discuss "his desire to revitalize U.S.-EU relations" …

Senate Banking has a hearing at 10 a.m. on the "American Rescue Plan: Shots in Arms and Money in Pockets" … Initial jobless claims at 8:30 EDT Our take on the seasonals suggests claims will be reported falling to about 725K from 770K. Consensus: 730K.

MORE DEM PUSHBACK ON OVERHEATING FEARS — A former senior Democrat now working on Wall Street emails: "Really hard for me to see why being over potential (if we even knew exactly where that is) by at most a few percentage points and even then only very temporarily leads to permanently higher inflation of scary magnitudes.

"To really pin people down you should ask them what inflation rate they expect for say 2023 and why. And then later evaluate how they did. The broad but vague concerns being expressed aren't that informative. And if we wind up at say 3 or 3.5 percent inflation for a year or two, it doesn't seem disastrous. s anyone predicting 5 or 10 percent inflation? If not what is the cause of the fire alarms?"

HILL DISSES ZUCK ON INTERNET REGS — Our Cristiano Lima: "Facebook CEO Mark Zuckerberg's take on how Congress should update internet regulations is falling flat on Capitol Hill, where a slew of lawmakers said … that the tech giant's plan for battling harmful content is a self-serving gambit to entrench its power online.

"In written testimony for a House hearing on Thursday, Zuckerberg proposed that Congress require online platforms to have a system to identify and take down certain illegal content, and revoke key liability protections if they don't. The decades-old legal shield, known as Section 230, protects digital platforms from lawsuits over how they police user content and what material they host on their services."

YELLEN CITES "THORNY QUESTIONS" ON STIMULUS AND TAXES — Our Toby Eckert: "Treasury Secretary Janet Yellen said .. the department has 'a host of thorny questions' to work through before it can give states guidance on a provision in the $1.9 trillion Covid relief package that prohibits them from using federal aid to subsidize tax cuts.

"Two issues she singled out: How to treat tax exemptions that states may provide for unemployment benefits, like the federal government is doing, and exactly how to determine whether a state is using federal money for a tax cut."

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Markets

STOCK INDEXES END LOWER — AP's Damian J Troise and Alex Veiga: "Stocks gave up an early gain and wound up broadly lower on Wall Street, led by declines in tech heavyweights like Facebook and Apple. The S&P 500 gave up 0.5 percent Wednesday, its second loss in a row, while the tech-heavy Nasdaq dropped 2 percent.

"Bond yields mostly fell after rising earlier this week. GameStop had another bumpy ride, losing a third of its value after releasing a disappointing earnings report. The money-losing video game retailer is still up more than sixfold this year after becoming a favorite of online investors who talked the stock up on online message boards."

SPAC TRADING POPS DEFLATE — Reuters' Joshua Franklin and Krystal Hu: "First-day trading pops, or share price rises, for SPACs were commonplace earlier this year with gains rising to over 30% but have faded in March amid a broader sell-off in many companies that have agreed to go public through a SPAC merger."

Fly Around

POWELL: RISE IN LONG-TERM BOND YIELDS REFLECTS ECONOMIC OPTIMISM — WSJ's Paul Kiernan and Kate Davidson: "Powell indicated Wednesday that he isn't concerned about a recent rise in long-term bond yields, saying they appear to reflect growing optimism about the economy's prospects. 'It seems that rates have responded to news about vaccination and ultimately about growth,' Mr. Powell said in a hearing before the Senate Banking Committee. 'And that has been an orderly process.'"

YELLEN SEES ROOM FOR U.S. TO BORROW, OPENS DOORS TO TAX HIKE — AP's Christopher Rugaber: "Yellen believes the U.S. government has more room to borrow, but said higher taxes would likely be required in the long run to finance future spending increases.

And she added that she's now open to bank dividend payouts — Reuters' Ann Saphir and David Lawder: "Yellen .. said U.S. banks look healthy enough to be allowed to pay dividends and repurchase stock, an updated view that reflects top economic officials' growing confidence in the recovery from the coronavirus pandemic."

BLACKROCK IS FOCUS OF YELLEN-WARREN CLASH ON TOUGH OVERSIGHT — Bloomberg's Jesse Hamilton: "BlackRock Inc. became the focus of a Wednesday clash between … Yellen and Elizabeth Warren, with the Treasury secretary suggesting she may oppose singling out the world's biggest asset manager for tougher oversight.

"Senator Warren demanded to know whether Yellen would direct the Financial Stability Oversight Council to consider designating BlackRock as a firm whose failure could threaten the financial system. In response, Yellen indicated that FSOC should focus on risky activities — citing mutual funds that can face fire sales in a panic — rather than individual companies."

From BlackRock statement : "The past two administrations in the US, and numerous global regulators, have studied our industry for a decade and concluded that asset managers should be regulated differently from banks, with the primary focus being on the industry's products and services."

IF THE ECONOMY OVERHEATS, HOW WILL WE KNOW? — NYT's Neil Irwin: "The New York Times asked some prominent participants in the Great Overheating Debate of 2021 to lay out in more detail what they are afraid of, and how we will know if their fears have been realized."

STEP INSIDE THE WEST WING : The Biden administration is more than halfway through its first 100 days and is now facing a growing crisis at the border and escalating violence against Asian Americans, while navigating the pandemic and ongoing economic challenges. Add Transition Playbook to your daily reads to find out what actions are being considered, as well the internal state of play inside the West Wing and across the administration. Track the people, policies, and emerging power centers of the Biden administration. Don't miss out. Subscribe today.

For Your Radar

TRANSITIONS —Nick Simpson is joining Swedish bank and online payment company Klarna as head of policy and public affairs, their first hire in Washington. Simpson is currently senior vice president of public affairs at the Consumer Bankers Association.

American Fintech Council, a newly formed lobbying group representing fintech companies, has named Garry Reeder as its chief executive. He most recently worked at the Financial Health Networkand is a former CFPB chief of staff and Treasury alum …

Kylin McCardle is now senior manager for financial services public policy at Amazon Web Services. She most recently was director for consumer regulatory policy and affairs at Citi and is also a House Financial Services and Richard Lugar alum. …

Julia Lawless is now senior manager for policy communications at Amazon. She most recently was managing director for strategic communications at Financial Services Forum and is also a Senate Finance Committee alum.

MOST BUSINESSS NOT CUTTING DOWN ON OFFICE SPACE — Per release: "Despite widespread use of remote work due to the COVID-19 pandemic, most businesses have yet to plan a reduction in their traditional brick-and-mortar office space, according to data from the first-quarter AICPA Economic Outlook Survey, which polls CFOs, controllers and other senior-level CPAs and management accountants in business and industry.

"Some 72 percent of business executives in the survey said their organizations had no plans to shrink their office footprint over the next 12 months. That's down five percentage points from the third quarter of 2020, the first time the question was asked."

HOW PEOPLE FEEL ABOUT COVID AND THE ECONOMY — Per MassMutual's inaugural Consumer Spending & Saving Index out this a.m.: "Despite having lived through other economic declines like the 2007 recession and dot com burst, 72% of Boomers agree this is the worst economic downturn they've seen – only modestly less than Gen Z/Millennials (79%)."

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