This economist bucks conventional wisdom on curbing inflation. His solution isn't easy.

Americans have blamed all sorts of culprits for the rapid increase in inflation, from the COVID-19 pandemic, the scarcity of workers and semiconductor shortage to spiking oil prices and the Russian invasion of Ukraine.

Maybe even President Joe Biden's green-energy policies, price gouging by businesses or other factors have played a role, depending on whom you talk to.

But the inflationary increase might have a simpler and more fundamental root cause: too much money sloshing around a system with too few goods.

Economist Christopher Thornberg takes the unconventional view that the federal government's massive financial response to the steep but short-lived recession sparked by lockdowns from the COVID-19 pandemic is what has really driven up prices. 

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He believes the other factors are largely irrelevant.

"The fiscal and monetary reactions were, and continue to be, excessive," said Thornberg, founding partner at Beacon Economics in Los Angeles. "The economy is overheating."

Cooling it down and lessening the inflationary menace will require painful actions that policymakers are reluctant to take, he added. But the sooner this excess-money situation is addressed head on, in his view, the better.

Too much economic stimulation

Speaking in Phoenix at a conference sponsored by Alliance Bank of Arizona, Thornberg said a turning point is drawing near because of the "insane degree of money supply growth put forth by the Federal Reserve."

He expects the U.S. Consumer Price Index, the main inflation measure, to hit double-digits later this year. The most recent national inflationary reading was 8.5% annually in March.

Since the early days of the pandemic, the federal government has injected $11 trillion into the economy, including $5 trillion of central bank bond purchases through the Fed's quantitative easing programs. The largess also included $2.1 trillion of stimulus payments, extended jobless benefits and other support for individuals – more than double the $820 billion or so in income that households actually lost.

"The foot is still on the gas pedal, even though the U.S. economy has recovered," Thornberg said.

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All that money has stoked demand for everything from food to vehicles, rental cars to housing. Massive federal spending and borrowing also have pushed up annual deficits and the government's overall debt. Dealing with these issues eventually will require tough choices down the road – spending cuts or tax increases. Thornberg said he considers the latter more likely.

No politician will to 'touch this grenade'

Higher interest rates, the bursting of asset bubbles, a recession and other consequences might be needed to squeeze inflation out of the system, he said. Taking that bitter medicine earlier rather than later could prove less disruptive in the long run.

The problem, however, is that politicians and other policymakers in Washington are reluctant to make tough decisions, especially if their actions might cost them their jobs.

"Nobody in D.C. wants to touch this grenade," he said.

Drawing parallels between the current inflationary environment and that of the 1970s, Thornberg noted that Jimmy Carter nominated Paul Volcker as Fed chairman, and Volcker succeeded in wringing out most inflation. But the cost was steep, including a recession that, at least partly, resulted in Carter losing the 1980 presidential election to Ronald Reagan.

Thornberg expects a recession down the road, but he doesn't know if one might materialize in a year or two, or perhaps three to four years. He also anticipates the bursting of various asset bubbles, as in venture capital funding, but doesn't anticipate a housing crash so much as a leveling out of home prices. Stock-market valuations are lofty, but he doesn't predict calamity there, either.

"What determines this path is the policy decisions by Congress and the Federal Reserve," Thornberg said.

Many see smooth ride ahead

His warnings about debt, deficits, higher interest rates and inflation don't reflect a consensus among economists. In many ways, his is a contrarian opinion.

For example, the Conference Board, an economics research group, in an April 14 forecast argued that the recent inflationary spike largely resulted from Russia's invasion of Ukraine.

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The Conference Board doesn't see a recession on the near-term horizon, and it doesn't see inflation getting much worse, either. Full-year inflation came in at 3.9% in 2021 and will rise to 5.9% this year before falling to 3% in 2023, the group predicts. The Conference Board tracks inflation using Personal Consumption Expenditures, a slightly broader measure than the oft-quoted Consumer Price Index.

Ryan Detrick, chief market strategist at LPL Financial, recently cited reasons to believe inflation could ease soon, largely because of supply-chain improvements. For example, he noted that oceanic shipping costs are dropping, and backlogs are easing in ports such as Long Beach and Los Angeles. Also, he said, recent price spikes on used vehicles are tapering off.

A March survey of 234 economists by the National Association for Business Economics didn't reflect alarming inflation anxiety either, though 3 in 4 respondents said they expected inflation to linger above 3%. If anything, nearly half of the respondents, 48%, said they'd like to see government policies focus primarily on spurring more growth, compared with only 25% who said they believe deficit/debt reductions should be the priority. Income inequality was cited by 15%.

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'There has to be a sugar crash'

The Federal Reserve has started to increase interest rates – a move that should help tamp down inflation, many economists predict. But Thornberg dismisses rate hikes as relatively unimportant. The more decisive way to combat inflation, he said, is for the central bank to remove cash from the economy through quantitative tightening.

While the Fed injected trillions of dollars into the economy by purchasing government bonds and other assets through quantitative easing, a quantitative-tightening effort would see the reverse: massive bond sales that remove trillions of dollars from the economy and cool demand.

Those actions wouldn't be pleasant and could tip the economy into a recession. Americans won't feel as rich as they do now, Thornberg said. But it's the necessary remedy and one that, he believes, is best addressed sooner rather than later.

"At some point, there has to be a sugar crash," he said.

Contact: russ.wiles@arizonarepublic.com.