Monday, April 13, 2009

WILL THE MASSIVE U.S. DEFICIT SPENDING CAUSE A SURGE IN INFLATION?

It seems logical that Obama’s stimulus packages and increased deficit spending will lead to an increased rate of inflation in the US. We were wondering if this postulation was true, so we compared the percentage change in inflation rates (annual CPI % change) with the percentage change in US Debt since 1948. Oddly enough, the comparison showed a strong decrease in the rate of inflation as the percent of deficit spending increased. So, we added the additional comparison of the yearly average percentage of unemployment and it starts to make a little more sense.

From the graph, it appears that increasing inflation is correlated with an extended period of low unemployment and deficit spending is related to high unemployment and not the cause of an immediate increase in inflation. Another interesting thing shown in the graph is that there are long lag times between increasing employment and increasing consumer inflation. It takes about 3 years of increasing employment before inflation rates starts to rise and about 2 years before increasing unemployment starts to lower the inflation rate. Increasing inflation rates appear to be related to high employment rates; when people have a stable income they spend more and that increases inflation. Deficit spending does not appear to immediately increase inflation, in fact inflation rates tends to go down during times of higher deficit spending.

Based on this graph, we think 2009 is year one of a two to three year cycle of sharply increasing unemployment. Even though there is huge deficit spending which will vastly increase US debt, if the trends in the graph hold, there should be five years of decreasing inflation. In 2011, employment should begin to recover and inflation will start to increase after the third year of increasing employment in 2014.

The graph also seems to indicate that sharper rises in unemployment result in shorter cycles of economic downturn, so we think the very sharp rise in unemployment in late 2008 and 2009 will shorten the length of increasing unemployment. Based on our findings, Obama’s massive stimulus package won’t increase inflation and may help to shorten the time to economic recovery.

Notes on the graph:

· Inflation is based on the Consumer Price Index(CPI) which is measure of the average change over time of the prices paid by urban consumers of a basket of consumer goods and services. It includes things like rents, apples, and gasoline in a large number of urban areas across the county. The base value is 100 which was achieved in 1984. The graph values are the percentage change in CPI from the previous year.
· The US Debt is always increasing; it increased from $252,292,246,512.99 to $10,024,724,896,912.40 between 1948 and 2008. During that time there were only 4 years where it decreased and only a small amount. The graph values are the percentage change in debt from the previous year. Decreases in the debt percentage means that the debt increased less that year than the previous year
· Unemployment is the yearly average based on the US Labor Department’s published monthly unemployment percentage. We used the average unemployment percentage in this graph because we think it shows the relationships to the US deficit and inflation more clearly than showing the percentage change as we have with the CPI and US deficit.

7 comments:

tonnes said...

I'll go out on a limb and guess that you're Obama voters.

Your graph is interesting, but isn't it just an attempt to cherry pick data to support your guy?

A far more interesting, and ultimately telling graph would be to show just how huge these new federal spending programs are.  The sheer size of the deficit renders any conclusions you may wish to conjure up from your squiggly graph, moot.

Here is a short video that helps put things into perspective.

I am not an economist.  But I like to think I have a fair amount of common sense, and I can't possibly think that the solution to our problems is even more spending and debt - the very ingredients that got us here in the first place.

Pray tell, how do you propose the government pay back all it's debt?  Massive taxation?  My bet is with inflation - the only way to pay back a debt that large is to devalue the currency.

Anonymous said...

Wow, you mean to tell me that Bush got us into this mess? Wow, be a true Republican and blame it all on Obama. I am, I don't care how much time he has been in the White House. He set this all up and has been secreatly in the background the last 8 years. Ha, and everyone thought Cheany was in change.

Grif Frost said...

Aloha! Interesting analysis. I have been trying to figure out a way to prepare or access a "Hawaii County" Economic report similar to what is prepared for the State annually. Any thoughts on how this might be accomplished? Would be interesting to do it by districts, then East and West Hawaii and finally a Hawaii Island summary.

Keahi Pelayo said...

No question that the increae in M1 is very concerning. Could higher interest rates be in the future if it kicks in? Yes.
Aloha,
Keahi

Ralph said...

Very interesting bit of research. Well done. However your graph is too small to read. I tried copying and blowing it up, but the text comes out blurred. I’d be very grateful if you could send a better copy to me at: ralph at fram dot ndo dot co dot uk.
Both you and “tonnes” seem to think that a big deficit necessarily equals a big government debt. Not true.

Financing a deficit by expanding the National Debt is one way of doing it: this is Keynsian “borrow and spend”. But an alternative is straightforward money printing: this is in effect what “borrow and spend” plus quantitative easing amounts to. There are obvious dangers with money printing, and doubtless much of this money needs reining in come the upturn. But my point is that “big deficit” does not need to equal “big debt”.

Lidarman said...

I'm not sure that it would be logical that increasing deficit spending increases inflation.

Why?

Well it is true that increasing the money supply does cause inflation. However, deficit spending doesn't necessarily increase the money supply. Money is not necessarily just printed. It can be borrowed, and I think that is usually the case.

Lidarman said...

I'm not sure that it would be logical that increasing deficit spending increases inflation.

Why?

Well it is true that increasing the money supply does cause inflation. However, deficit spending doesn't necessarily increase the money supply. Money is not necessarily just printed. It can be borrowed, and I think that is usually the case.