Washington Insider-- Wednesday

Great Inflation Debate Heats Up

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

US, China Hold Phase One Discussion

U.S. Trade Representative Robert Lighthizer, Treasury Secretary Steve Mnuchin and Chinese Vice Premier Liu He held discussions via telephone Monday evening, Washington time, to assess the status of the Phase One trade agreement between the two countries.

A statement from the Office of the U.S. Trade Representative (USTR) said the “regularly scheduled call” saw the parties discuss “steps that China has taken to effectuate structural changes called for by the Agreement that will ensure greater protection for intellectual property rights, remove impediments to American companies in the areas of financial services and agriculture, and eliminate forced technology transfer.”

The discussions also covered the “significant increases in purchases of U.S. products by China as well as future actions needed to implement the agreement.”

The Xinhua News Agency said the discussion was a “constructive dialogue on such issues as strengthening bilateral coordination of macroeconomic policies and the implementation of the China-U.S. phase-one economic and trade agreement.”

Both the U.S. and Chinese side said they were committed to implementing the trade deal.

USTR said the two sides “see progress and are committed to taking the steps necessary to ensure the success of the agreement,” while Xinhua reported the two countries “agreed to create conditions and atmosphere to continue pushing forward the implementation of the trade deal.”

CFAP Payments Rise To $9.222 Billion

Payments under the Coronavirus Food Assistance Program (CFAP) increased to $9.222 billion as of August 24, up from $9.02 billion the prior week.

Payouts for livestock remain the highest at $4.607 billion, with $2.425 billion for non-specialty crops, $1.699 billion for dairy and $479 million for specialty crops.

By commodity, USDA said that $3.992 billion has gone for cattle, $1.699 billion for dairy, $1.634 billion for corn, $573.8 million for hogs, $466.8 million for soybeans and $237.7 million for upland cotton. No other commodities have seen payments totaling $100 million or more.

Iowa still tops the list of states receiving CFAP money at $921 million, followed by Nebraska at $664 million, Minnesota at $573 million, Texas at $544 million and California at $515 million.


Washington Insider: Great Inflation Debate Heats Up

Hardly any question carries greater weight in economics right now, or divides the financial world more sharply, than whether inflation is on the way back, Bloomberg explains in an article this week.

One camp is convinced that the no-expense-spared fight against COVID-19 has put developed economies on course for rising prices on a scale they haven't seen in decades. The other one says the virus is exacerbating the conditions of the past dozen years or so--when deflation, rather than overheating, has been the big threat.

For now, the jury is out, Bloomberg says. And, the data that will ultimately settle the question could take years to trickle in. In the meantime, investors and the public are left to weigh the arguments. Bloomberg presents what it calls some of the “main ones.”

The idea that the money supply affects prices directly is still a widely held view. And those who hold it are pointing to the wave of money created by governments to fight the pandemic–-and predicting that sooner or later it will wash through the whole economy and push prices up.

In many countries, money supply is growing at some of the fastest rates on record and unlike a decade ago, when a similar infusion of money never moved much beyond banks' balance sheets, there are signs this time around the cash is making its way into the pockets of consumers and companies.

Bloomberg thinks that it is “the use of money, not just its creation, that affects prices.” That's one explanation for subdued inflation since 2008, even as central banks cranked up the printing presses. And the same forces may still be at work.

In the U.S. the “velocity” of money — the frequency with which it changes hands, as people use it to buy goods and services — fell off in the 2008 financial crisis, never really recovered, and has collapsed to unprecedented lows now.

“The link between money supply and inflation is still very tenuous,” says Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington. “We may have a ton of money supply. But that's not necessarily going to lead to a ton of inflation.”

Observers argue that spending may bounce back faster than it did after 2008 and drive prices higher because a more aggressive policy response has cushioned the blow to household finances. Stock markets have taken months instead of years to recover. Home prices didn't take much of a hit. And lower down the income ladder, governments have provided substantial support to workers who got furloughed or fired.

“We're clearly not back to normal in the short term until people spend the money that the Fed has created and the government has sent them,” says John Ryding, chief economic advisor at Brean Capital.

Policy makers often cite a trade-off between inflation and unemployment—the idea that prices will only face sustained upward pressure when the economy is using all its resources, including labor. The strength of that link is uncertain, but “if there's any connection at all, then it should ease concerns about inflation.” Employment everywhere has slumped, with little prospect of a quick rebound to pre-pandemic levels.

Bloomberg already sees evidence that disruptions to supply chains are pushing prices up, however. In China, for example, food inflation has been accelerating in the last couple of months, and a squeeze on imports because of the pandemic is one reason why.

The long-run risk is that the virus will escalate tensions like the ones behind the U.S.-China trade war. Governments may become more reluctant to rely on other countries for strategic goods, such as masks and medicine or computer chips. They could pressure business to bring manufacturing home, even when it's more expensive.

The fight against COVID-19 has often been compared with an actual war, the kind of disaster that historically has triggered inflation. But there's an important difference, Bloomberg says. Military conflicts wreck the supply side of the economy leading to bottlenecks and shortages that push prices up. The coronavirus has left those facilities intact — even if they're not being used right now.

In a pandemic, it's demand that takes the main hit, says Alicia Garcia Herrero, chief Asia Pacific economist with Natixis SA. “Capital is not destroyed or depleted, so it is much easier to end up with excess capacity,” she says. That distinction is one reason she's “in the deflation camp.”

So, we will see. While there is still strong concern about the possible impacts of high debt levels, there seems to be much broader tolerance among the public than there was as recently as a decade ago. Certainly, high inflation is deeply dreaded as it has always been, but so is the opposite — especially, unemployment and job loss. Thus, the “inflation debate” is more important than usual and should be watched closely by producers as it intensifies, Washington Insider believes.

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