Time for my one economic bloviation of the year - at least I'll try to predict something.
Armchair economists (and plenty of actual economists) have been predicting inflation for years, based on ballooning budget deficits. But both treasury yields and inflation 'break even' measures suggest little market concern. Why would this be?
I believe Robert Shiller generally when he says that the Great Recession changed people's mindsets in a lasting way. Monetary velocity has plummeted as budget deficits have ballooned - part of this may be explained by foreign dollar holdings (foreign governments turn over dollars slower than US consumers). The remainder, however, must be explained by people's time-value preference for spending and saving. Since 2008, people have essentially felt less certain about their own future financial security, and they are saving more to compensate. A third factor is that we are slowly inflecting from a pension-based system to a savings-based system. The latter puts the onus on the individual to concern themselves with things like withdrawal rates and adverse market fluctuations (and the popular narrative is that these are becoming more severe when they occur).
If all this is correct, I predict that we'll get inflation when a UBI (Universal Basic Income) program is passed, which I suspect may just be a matter of time. Why? Not because of budget deficits, but because UBI is essentially a state pension. It would increase perceived financial stability because it would be a permanent income stream (assuming people found the legislation's permanence credible).
When I say, "not because of budget deficits", what I mean is that I believe inflation will follow even if the program is deficit-neutral. I don't even have to know the details - my prediction assumes the dollars being spent into existence in this program will have a profound impact on monetary velocity. Why? Because, as I said, UBI is like a state pension, and thus eliminates the need for proportionate savings. Just for argument's sake, if UBI were $1k/month ($12k/year), how much required savings per person would that eliminate just to 'break even'? It depends on withdrawal rate, etc., but assuming an annual 4% withdrawal rate, it would offset $300k of savings.
What would happen if every American suddenly realized they could do some combination of: spend $300k of savings they already had, or forego saving $300k of future income? Would that have a profound effect on inflation? My modest guess, as of August of 2020, is yes.
