McConnell gives ‘kudos’ to Bill Clinton’s Treasury Secretary for warning about hyperinflation

Mitch McConnell
Senate Minority Leader Mitch McConnell of Kentucky speaks after a GOP policy luncheon on Capitol Hill.

  • McConnell gave former Treasury Sec. Larry Summers “kudos” on Monday for his comments about inflation.
  • Summers, who served in the Clinton and Obama administrations, has repeatedly slammed Biden’s spending.
  • Summers continues to forecast dangerously high inflation, but signs point to price growth cooling in June.
  • See more stories on Insider’s business page.

Senate Minority Leader Mitch McConnell is siding with an unlikely ally as he rails against President Joe Biden’s spending plans: former Treasury Secretary Larry Summers.

The senator from Kentucky gave Summers “kudos” on Monday for “predicting” the now-elevated rate of inflation. Price growth accelerated in May to its fastest one-year pace since 2008 as massive demand butts heads with supply-chain issues and widespread shortages. Republicans recently doubled down on their worries around rising inflation and blamed the Biden administration for fueling such risk.

McConnell echoed such sentiments during a Monday press conference and invoked Summers as a harbinger of the price surge.

“He predicted we would have raging inflation, and that is, in fact, what we are grappling with today,” the Minority Leader said.

Summers, who served as President Bill Clinton’s Treasury Secretary and as director of the National Economic Council for President Barack Obama, has spent much of 2021 railing against the Biden administration and the Federal Reserve for their policy stances. He criticized Democrats and Republicans in March for passing the “least responsible” fiscal policy of the last 40 years, adding both parties were creating “enormous” risks.

Just last week, the former Treasury Secretary warned the US could see inflation “pretty close” to 5% by the end of the year.

Other Republican lawmakers have seized on Summers’ words, using them as ammo with which to slam Biden’s economic agenda. Mentions of rising prices have become commonplace at GOP press conferences, and a late May memo urged party members to refer to inflation as “Democrats’ hidden tax on the Middle Class.”

Yet Republicans have frequently cited products’ year-over-year price gains as proof of overwhelming inflation, an inherently skewed comparison as it refers back to price declines seen at the start of the pandemic. The early 2020 readings now make for a lower bar to clear and boost year-over-year readings.

Summers’ remarks also directly conflict with the outlook held by the Biden administration and the Fed. The “overwhelming consensus” is that inflation will “pop up a little bit” before fading to healthy levels, Biden said Thursday. Fed Chair Jerome Powell on June 16 repeated his expectation that inflation will prove to be “transitory” as bottlenecks were addressed.

Early signs suggest Powell’s forecast is correct. Prices of used cars, industrial metals, and lumber all cooled through early June, signaling broad inflation could soon slow to less concerning rates.

The deficit-spending debate rages on

McConnell also knocked Democrats’ proposals to spend trillions of dollars more on infrastructure and family support programs. Passing a “portion” of Biden’s original infrastructure plan makes sense, but approving both of his follow-up plans would be “wildly out of proportion to what the country needs,” McConnell said.

“The pandemic is, essentially, in the rearview mirror. To continue to borrow and spend at this level is completely unacceptable for the future of this country,” he added.

The push for fiscal austerity contrasts with May comments from Treasury Secretary Janet Yellen. With the Fed set to hold rates near zero well into the future, the government should spend on support programs before debt becomes a bigger burden, she said.

“We’re in a good fiscal position. Interest rates are historically low… and it’s likely they’ll stay that way into the future,” Yellen said. “I believe that we should pay for these historic investments. There will be a big return.”

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The national debt will nearly double by 2051 if taxing and spending stay the same, CBO says

US capitol
The Senate side of the Capitol is seen in Washington, early Monday, Nov. 9, 2020.

  • A new report from the CBO forecasts the federal debt to nearly double to 202% of GDP by 2051.
  • The CBO sees the government’s budget deficit declining after the pandemic before rising again.
  • The outlook hinges on taxing and spending laws staying the same, the CBO said.
  • Visit the Business section of Insider for more stories.

The federal government’s debt pile is on track to nearly double over the next three decades, according to the nonpartisan Congressional Budget Office (CBO).

Government debt swelled over the past year as lawmakers passed stimulus bills aimed at helping Americans through the COVID-19 recession. The increased spending led federal debt to reach 100% of gross domestic product at the end of 2020.

Should current laws for taxing and spending stay the same, that share is estimated to reach 102% of GDP by the end of this year, the CBO said in its long-term outlook report. Federal debt would then reach a record-high 107% of GDP in 2031 and nearly double to 202% of GDP by 2051, the office added.

The federal budget deficit – the amount that government spending exceeds tax income – is projected to fall to 10.3% of GDP this year from 14.9%, still the second-highest level since 1945. While it will stay elevated, the shortfall will decline as as pandemic-related expenses fade, the CBO said. Deficits will total 5.7% of GDP in 2031 and soar to 13.3% by 2051, according to the report.

The report doesn’t account for the $1.9 trillion stimulus package currently making its way through the Senate. House Democrats approved the measure on Saturday, and President Joe Biden has indicated he aims to sign the bill before expanded unemployment benefits expire on March 14.

Officials including Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell have repeatedly sought to dispel fears that the government won’t be able to finance its own debt. Near-zero interest rates ensure that, at least for now, the government’s cost of borrowing remains relatively low.

Yet the recent jump in Treasury yields signals those rates could climb sooner than previously expected. After the bond market saw elevated volatility last week, investors continued dumping government bonds on Thursday, betting on new stimulus to fuel a swift recovery and stronger inflation. The Treasury market is now pulling forward expectations for a rate cut from after 2023 to sometime in 2022.

Higher rates, when coupled with surging debt, can place the government in a compromised position, the CBO said.

“A growing debt burden could increase the risk of a fiscal crisis and higher inflation as well as undermine confidence in the US dollar, making it more costly to finance public and private activity in international markets,” the office added.

The CBO’s report could give Republicans more firepower with which to slam Democrats’ stimulus proposal. Senate Democrats advanced the bill on Thursday in a party-line vote, starting a lengthy debate process that Republicans are set to use as a roadblock for the plan’s passage. Discussion will be limited to 20 hours, teeing up a final vote for the weekend after a marathon amendment process.

The gloomy debt projections also don’t account for the large-scale infrastructure plan Biden aims to pass. The president has already started talks with lawmakers about a multitrillion-dollar infrastructure push that would further boost economic growth coming out of the pandemic.

If it passes, the proposal stands to give the national economy a shot in the arm – and to further increase the country’s debt pile.

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