COULD 2014 be the year that the U.S. economy gets back to normal, with faster inflation as one consequence? At least, that's the argument that Business Insider's Joe Weisenthal made over the weekend.
Such predictions have been wrong before, but enough has changed during the past six years to make this a serious position.
The difference between this recovery and previous ones is that people no longer were willing, or able, to borrow as they once did. The effect was a steady contraction in the amount of debt owed by the household sector — until now. The latest Flow of Funds data show that American households increased their total borrowing for the first time since 2008.
In theory, this could be attributed solely to the hedge funds and private-equity firms included in that category, but it's more likely that the combination of rising asset values, an improving job market and relatively robust real wage growth has made regular people more confident about the future.
Why should a growing economy cause inflation to accelerate? Milton Friedman famously quipped that "inflation is everywhere and always a monetary phenomenon," but this isn't actually very useful for people who want to know why the prices of goods and services rise. After all, nobody knows just what exactly a "monetary phenomenon" is.
Over the past six years, the Fed's balance sheet has more than quadrupled. That sounds like a lot, but M2, which is the total value of checking and savings accounts, has only increased by about 50 percent. Broader measures of money have been little changed since 2008.
In a fascinating post for the CFA Institute, Matt Busigin argued that the capital stock and labor supply were much better predictors of future inflation than anything having to do with monetary policy. Domestic capital investment has been weak for years, in part because capacity was developed abroad. Even now, businesses are reluctant to invest in additional productive output when there are so few customers.
At the same time, we are now in a situation where, despite high unemployment, there may not be much spare capacity left in the labor market. That may sound strange (or even offensive) given the yawning "employment gap" found by researchers at the International Monetary Fund, but it's possible.