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In today’s issue:
- Who is the King or Queen of the US economy?
- Kamala Harris isn’t worried about inflation
- Balancing growth, inflation, and emissions
Corbet’s Couloir in Wyoming is one of the most famous cliffs in extreme sports.
Made famous by Shane McConkey and the freestyle skiing competition Kings and Queens of Corbet’s, the legendary ski run at Jackson Hole comprises a vertical drop into a steep, narrow, icy run out that’s flanked by high cliffs.
The trail is as close as the freeskiing world gets to a Lord’s or a Wimbledon. It’s a focal point, worthy of pilgrimage.
This week, the US Federal Reserve, led by “King” Jerome Powell, will gather in Jackson Lake Lodge, more than 2,000 metres up in the Grand Teton national park in north-west Wyoming, though the drop they’ll be discussing will be economic, not geological.
Powell’s immediate audience will be the other central bankers, academics and journalists invited to spend three days discussing the finer points of monetary policy.
Many of them will be hoping that inflation has not only peaked but come all the way back down the other side of the mountain, and durably so:
US annual inflation rate
Source: Koyfin
They will keenly debate the nuances of its creation and reduction, and how soon they might be able to cut interest rates. The whole financial world will be watching.
Meanwhile, the “Queen” in waiting, Kamala Harris, is proposing we all get on a chairlift, with a raft of quite inflationary-looking policies. Much of what she has said and done since becoming the likely Democratic candidate has been promising, strong and encouraging. But a few of her latest economic ideas have raised eyebrows.
For starters, she has attacked grocery store price gouging, in what can probably be described as a bout of political point-scoring. Not everyone is impressed.
According to Bruce Richards, CEO of Marathon Asset Management, government price controls on food are a “terrible idea”.
“Grocery stores operate on razor thin margins, many will be forced to close if price caps were imposed. Food manufacturers will deliver smaller size containers of food, or sell cheaper food products to maintain their profit margin.”
Ignoring the private sector response to policy initiatives like this has sometimes been a hallmark of left-wing politics, and you can see why it might do their election prospects more harm than good despite the good intentions.
“If one really wants to place blame, the government should look in the mirror and evaluate the impact from government lockdowns during COVID and its profound impact to the food supply chain, plus impact from enormous monetary/fiscal stimulus that drove inflation,” said Richards.
What’s more, Harris’s proposals also include offering up to $25,000 in down-payment assistance for “eligible” first-time buyers, a move that her campaign estimated could reach four million households over four years. This could add another $100 billion to the national debt, at a cool $500 cost per working-age citizen.
That’s on top of a whopping $270,000 of debt per US taxpayer – an extraordinary figure. It’s reached that level because US debt-to-GDP has risen from 35% in 1980 and 57% in 2000 to 123% today.
Another Harris proposal to increase the tax credit for children to as much as $3,600, which Congress did temporarily during the pandemic and opted against extending, would cost more than $1 trillion, according to some estimates.
One fear that many have about these “new” policy ideas is that they might not even help. For instance, with a $25k tax credit thrown into the market, housebuilders might respond by simply pushing up the price and adding to their own margin. After all, why leave free money on the table for someone else?
Certainly, with the US gorging on debt, Kamala seems keen to spend it.
Against a backdrop of the worst inflation in 50 years, with the central bank nervously tip-toeing towards a rate cut in terror of reigniting inflation, Harris has pushed ahead unconcerned.
Others are worried though.
Jason Furman, who chaired the Council of Economic Advisers in Barack Obama’s White House, told the New York Times that price-gouging measures were “not sensible policy” and could hit supply.
“I think the biggest hope is it ends up being a lot of rhetoric and not reality. There’s no upside here, and there is some downside,” he said.
Saying that, this isn’t just a democratic or left-wing inclination. Donald Trump’s running mate, JD Vance, has gone even further, proposing an even larger tax credit expansion than Harris. And let’s not forget that Trump himself wants to cut taxes and interest rates. In short, government spending is being gladly proposed by both sides of the political spectrum.
Fifty years ago, in the early 1970s, the US government suggested car sharing and cardigans as ways people could contribute to the battle against inflation.
Today, the politically mouthwatering prospect of offering freebies and spending plans is popular on both sides of the political aisle.
But in Jackson Hole, it’s not clear who really controls the purse strings – King Jerome or Queen Kamala.
The answer is pretty relevant, because there are some vast expenses faced by the global economy in the coming decades, not least in the energy transition.
Last year, BloombergNEF reported that $1.8 trillion was spent on the energy transition (up 17% on the year before), which remains top of many national agendas despite the escalating conflicts and worsening economic situations across the world.
However, this was still way off the $4.8 trillion annual spend that BNEF estimates will be needed before 2030 to align with its net zero scenario.
Given that inflation comes not from grocery store price gouging, but from the marriage of fiscal and monetary stimulus (central banks printing money, and governments spending it), the energy transition is certainly an awkward spend to navigate.
In many people’s view, mine included, extensive climate action is imperative – and not just to save Corbet’s Couloir from melting. This view is based on an estimate of the costs of action today versus the costs of inaction in the future. This is naturally an imprecise science, but we are currently way off equilibrium.
As vice president, Harris was instrumental in promoting the Inflation Reduction Act (IRA), the largest climate spending law in US history at $369 billion.
If Harris is elected, she looks set to continue significant public investments in climate and energy.
However, with the US having only just regained control over the annual inflation rate, Kamala’s spending plans also pose questions of the global economy, at least over the short term.
To my mind, the energy transition will be a key driver of economic growth, adding jobs and productivity. It will end up being economically as well as an ecologically positive.
But if this growth also contributes to inflation, then we can expect more dissenting voices.
Here at Southbank Investment Research, we’ve been thinking a lot about this discord between inflation and politics in recent weeks.
In fact, Nick Hubble and John Butler over at The Fleet Street Letter have put together a stack of in-depth research, some video content and a few startling conclusions for you on this topic.
Very soon we’ll be able to share some of that important information with you – so keep your eye out.
All the best for now,
James Allen
Contributing Editor, Fortune & Freedom
