CUNA Economists Debate The Future

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SAN DIEGO-There is a significant risk of inflation in the coming years. Or, perhaps market factors will check rising prices.

The global economy is stagnating due to a number of issues ranging from falling home prices to continuing long-term unemployment. Or, a self-sustaining economic expansion is right around the corner.

Those were divergent views offered by two CUNA economists during the CUNA CFO Council conference here. Steve Rick, senior economist, economics and statistics, presented a case that 2011 is "looking eerily similar" to the 1970s, when a confluence of slow growth and high inflation introduced a new word to the American lexicon, "stagflation."

On the other side was Mike Schenk, VP-economics and statistics for the Madison, Wis.-based trade group. Schenk argued, among other things, that continued worldwide wage differentials will keep inflation in check, and productivity growth in recent years signals a "dynamic, growing economy."

Rick and Schenk actually held two debates: Inflation vs. Reflation, and Stagnation vs. Expansion. In the former, Rick said he feared the Federal Reserve, which has kept short-term borrowing rates at record lows for several months even after the technical end of the recession-may not be willing or able to tighten monetary policy at the appropriate time.

"And if the Fed's actions do not lead to inflation, then massive spending by the Treasury Department will," Rick declared. If Treasury's recent policies lead to concern by foreign investors, he continued, a drop in the value of the dollar will lead to a jump in import prices.

"Look around," Rick said, "it looks like the 1970s again. We have volatile commodity prices and a loose monetary policy."

Schenk agreed that the money supply in the U.S. has increased, but said a drop in the money multiplier is more significant than simply measuring dollars in circulation.

"Money supply is not always an indicator of inflation," Schenk said. In response to Rick's fear the Fed may not increase interest rates out of concern over choking off the recovery, he said Federal Reserve Chief Ben Bernanke "is very aware of the problems inflation can cause."

According to Schenk, there is "no possibility" of a wage/price spiral given the fact the unemployment rate is significantly above the historic level of approximately 5%.

"The Fed will counteract inflationary pressures caused by rising private sector demand by withdrawing liquidity and raising short-term rates," Schenk said.

Stagnating Economy? Or Expanding?

In the second debate, Rick sounded an alarm on the U.S. government's budget deficit, as well as continuing issues with federal entitlement programs such as Social Security and Medicare. In addition, he said, state pensions are underfunded by $3 trillion, creating the possibility of a bond or pension promise default.

"If Congress fails to address the deficit and entitlements problems, there will be capitulation in the bond market," Rick said. "Beyond those issues, the economy is driven by consumer spending, which makes up 70% of GDP. If consumer spending is not growing, then the economy is not growing, and pay is stagnating for the middle and lower classes."

Schenk countered that the housing market "seems close to the bottom," and he expects "improvement" in the next 12 months.

"The big news is the economy has added 225,000 jobs per month in the last three months," Schenk said. To which Rick replied, "Job growth is too slow. It needs to be 400,000 to 500,000 jobs added per month to make up for job losses during the recession."

For what it is worth, the audience of CFOs (and some CEOs) agreed with Schenk that a low-inflation scenario is more likely than runaway prices, but they agreed with Rick that stagnation, rather than expansion, is in the foreseeable future for the economy.

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