The US Economy: Stimulation and Large Geostrategic Risks

Joe Biden is about to preside over the biggest stimulus package in the modern history of the US. It represents a big but risky opportunity and the US’s allies should hope that it succeeds.

The US Congress has passed President Joe Biden’s $1.9 trillion coronavirus relief package and the president is expected to sign it today. It is a triumphant moment for the ruling Democrats early into Biden’s term. And it also amounts to a significant moment in the history of the US. For it will be the start of a big political gamble which, if it succeeds, will guarantee another age of US prosperity but, if it fails, could overturn most of our current strategic assumptions.

It is over 40 years since Paul Volcker took office as chairman of the Board of Governors of the Federal Reserve. At the time, stagflation – a combination of high inflation and unemployment and slow economic growth – ravaged the US economy: inflation was 12% and subsequently peaked at over 14%. After implementing dramatic interest rate increases, Volcker was able to arrest the double-digit inflation. Ultimately, this paved the way for a quarter century of great prosperity.

Until recently, seeking or tolerating higher inflation was anathema to the so-called Washington Consensus, the policy prescriptions generated by Washington-based institutions such as the International Monetary Fund, the World Bank and the US Department of the Treasury. However, the consequences of the financial crisis of 2007/08 and of the coronavirus pandemic have stretched policymakers’ attention well beyond that singular focus. Uneven prosperity growth for the asset-rich compared to those left behind have forced the debate on policy measures to address societal inequalities and previously untapped labour resources. The questions of why a defined rate of unemployment is necessary, or why going below it is dangerous, have been posed. Janet Yellen, former chair of the Federal Reserve, now Treasury Secretary, summed up her conclusion to the debate during a recent appearance on CNN:

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