On one hand, Janet Yellen is a highly trained economist who understands the Joe Biden spending bonanza could be a recipe for economic disaster.
But as Treasury Secretary, she is also the captain of the Biden economic team, downplaying inflationary fears and cheerleading the big-budget bills. The schizophrenic nature of Yellen’s role inside the White House played out earlier this week with a rare public dissention from official administration economic talking points. Wittingly or not, the Treasury Secretary signaled to the American public that Biden’s spending blitz of $2 trillion here, and another $5 trillion there, has the potential to backfire and send the economy back into recession.
It began early Tuesday, when Yellen apparently forgot she was no longer President Obama’s Fed chair, with a shield of at least quasi independence. At a conference hosted by the Atlantic magazine she conceded something glaring obvious to someone who had just taken Econ 101, much less earning a PhD: “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat . . .” That is, unlike what happened when Obama pushed through a huge stimulus package in the aftermath of the 2008 financial crisis, Biden wants to spend countless trillions at a time when the US economy is in full post-COVID recovery mode.
Too much money chasing too few goods means we could find ourselves in the same position as the late 1970s, with hyperinflation. As Yellen well knows, inflation is a massive tax increase on working people and it almost always leads to a recession as the Fed cranks up interest rates to slow down the economy.
The Fed, of course, could sit on its hands and do nothing, but bond market won’t. Traders will sell bonds because they’re a lousy inflation hedge. Spiking yields on the 10-year and 30-bonds (which move in opposite direction from prices) will spread to interest rates on credit cards, mortgages and business loans.
When it becomes more expensive for businesses and consumers to borrow, the economy slows and you can forget that annualized 6.4 percent GDP rate we had in the first quarter. Depending on just how much rates rise, the economy could fall back into a recession.
Of course, it is not Yellen’s job to control the money supply and interest rates. That’s up to Fed chair Jerome Powell. But if Yellen has Powell’s back, it will be easier for the Fed chair to pre-emptively move and raise rates to prevent any major inflationary impact from Biden’s spending spree.
At least that was the interpretation of the markets. Stocks tanked more than 300 points following Yellen’s remarks at the morning conference. They would have kept going south if Yellen didn’t flip-flop just a bit later, this time at a Wall Street Journal conference, where she adopted the White House line on the spending.
Sounding more like Jen Psaki than a former Fed chair, Yellen then said that she doesn’t “think there’s going to be an inflationary problem” and that she really wasn’t predicting doom and gloom earlier in the day.
OK, and I have a bridge in Brooklyn to sell you.
The good news from Yellen’s about face is that stocks recovered and extended their rally through Wednesday.
The bad news: The administration continues to hide the obvious potential long-term damage of its spending extravagance that even its own people are seeing as a real possibility.
You can only guess why Yellen backtracked. Mine is that as she was busy conference hopping, someone in the White House told her the markets were falling and she better put the genie back in the bottle. Remember, the White House game plan is to spend as much money as they can to hopefully prevent the GOP from controlling the House and the Senate during the 2022 midterms.
So what’s a little inflation in the short-term?
Too bad Yellen caved — Americans could use someone to state the obvious: A little inflation usually turns into something bigger and more dangerous. And Biden may be spending us back into recession.