Central banks around the
world have injected money into the economy at a record
pace to try to fight a global recession triggered
by the coronavirus pandemic. Just getting word
from the Federal Reserve. Bombshell announcement
from the Federal Reserve. It is an
absolutely historic week both in the terms of the speed
of Fed purchases and, of course, the magnitude. Since mid-March, the
Federal Reserve's balance sheet has ballooned from
4 trillion dollars to around 7 trillion dollars,
equal to about one third of the value
of the entire American economy. A new CNBC
survey showing that market participants expecting trillions
more in stimulus from both the central
bank and Congress. At the same time,
governments have enacted record amounts of fiscal stimulus
to boost economies stalled by the pandemic. The infusion of cash
into the financial system has renewed concerns that
inflation could surge. As Milton Friedman said,
inflation is always and everywhere a
monetary phenomenon. If you believe that, you
look at the central bank balance sheets exploding right
now and you say there's going to
be inflation. Supply shocks have driven up
prices for some goods over the past few months. Yet recent history suggests
inflation is more likely to stay low for
a long time as unemployment remains near record
high levels and consumer spending
is subdued. While this certainly is quite
a lot of disruption to the supply side of
the economy, that's likely to be dominated by the
huge hit to aggregate demand. So how will
trillions of dollars of economic stimulus affect
the outlook for inflation? Inflation refers to an increase
in the prices of goods or services
over time. One well-known measure of
inflation in the U.S. is called the Consumer
Price Index, or CPI. The CPI is about the
prices that we pay for services and goods and
housing and rent. Economists say some inflation
is healthy for the economy. When the
economy's growing, more consumers and businesses are
out spending money on goods and services. This increase in demand
results in higher prices. Demand is an important factor
in the outlook for inflation. Generally, when
unemployment is high and consumer demand is
weak, inflation is low. Another factor that affects
inflation is commodity prices. If oil prices rise
because there's a cut in production, gas prices
might increase too. Consumer and business
expectations about prices are another piece of
the inflation puzzle. If a lot of people expect
prices will rise in the future, they might spend
more now, ultimately causing inflation. The level
of actual inflation that we get will be
pretty heavily influenced by the inflation rate that
actors in the economies, households, businesses,
consumers, workers, investors expect
to prevail. Like many other central
banks around the world, the Fed targets a
2 percent yearly inflation rate. At that rate, a cup
of coffee that costs 2 dollars this year would cost
2 dollars and 4 cents next year, not quite
enough to break the bank. Central banks
adjust their policies normally by changing interest rates
to try to get to that 2
percent inflation level. You definitely want to
keep enough inflation so you can still have enough
space to raise and lower Fed funds over
the business side. Too much inflation isn't
a good thing either. As inflation rises, the money
that you hold today becomes less
valuable tomorrow. At a 15 percent inflation
rate, for example, your 2 dollar cup of coffee today
costs 2 dollars and 30 cents next year. Think of how that would
affect a bigger purchase like a car. A ten
thousand dollar purchase today would cost eleven thousand
five hundred dollars next year. When the
inflation rate is very high, it is very difficult
to make any calculation about saving. Inflation concerns for now
are to the downside. The risks are to the
downside, not to the upside. We see prices
moving down. That's because in a lot
of parts of the economy, people are
cutting prices. Lockdown's have already depressed
prices in the US as consumers stay home
and remain cautious about spending money in
an uncertain economy. The second biggest drop
in headline inflation since 1947. Energy commodities down 20
percent, with a 20 percent decline
in gasoline. Fuel oil down 15 percent. There have been pockets
of inflation in some areas, like groceries as
more people cook at home. Disruptions in global
trade from the virus have also raised prices
for goods like medical supplies. Still, these
supply shocks haven't offset overall
weak demand. If you're in the
average person's seat, we're talking about, you know,
grocery stores and that sort of thing. The idea
that there's going to be an outbreak of inflation, you
know, 4 percent, 5 percent, that is just
not on the horizon. Many economists and policymakers
expect wages will stay low as
unemployment remains high. Meanwhile, people are saving
instead of spending their cash out of fear
the economy could get worse. To try to boost the economy,
policymakers in Washington have pumped trillions of
dollars into the financial system in
recent months. Economic theory suggests all
this money printing could create the
risk of inflation. Economist Milton Friedman famously
said that if there's too much money
in the economy, chasing too few goods
prices will rise. When inflation was surging
in the 1980s, Fed Chairman Paul Volcker put
Friedman's theory to the test, and it worked. Volcker slowed the growth of
money going into the economy and raised interest
rates to tame inflation. But economists say
there's been a break in the link
between money creation and inflation in recent years
as the banking system has become more complex. The rise of the financial
system and the sort of the diversification of the
financial system is one of the reasons why
sort of the Milton Friedman view of the world
really is not as applicable, particularly in the
United States, as it was in
an earlier time. It's important to understand
that when the central bank prints money today, most
of it isn't in the form of physical
dollar bills. Instead, the Fed
creates electronic money. It uses that electronic cash
to buy assets and lend to banks, injecting
money into the banking system. To buy treasuries,
for example, the Fed uses so-called primary dealers,
a group of around two dozen big banks
and brokerage firms that trade bonds. What happens
when the Fed creates money? It strictly creates
central bank reserves. Those are held by
the banking system. The banks decide, you
know what what they're willing to lend out
into the economy. That means that even if the
Fed is pumping a lot of money into banks like
it is today, the money won't reach the hands
of consumers until banks lend it out. It is
true that money has been handed out directly to citizens
as part of the federal government's coronavirus
response, like the 1,200 dollar
stimulus checks. This cash infusion still
may not result in inflation. Most Americans needed
the checks to make day to day payments
to make up for lost income during the crisis. Not to go out and
spend lavishly on other purchases. I think of
them as more life preservers, trying to prevent
the economy from getting into a deeper hole
because of the Kovik crisis. And they don't
represent stimulus yet. Recent history suggests that
all the fiscal and monetary stimulus daring the
pandemic is unlikely to increase prices for
consumers when the Fed bought trillions of dollars
of assets after the 2008 financial crisis,
inflation never surged. After the Great Recession,
there was a conviction that all the fiscal
and monetary stimuli were going to result
in huge inflation. As a matter of
fact, a number investors, including some very famous
hedge funds, went to gold. Well what happened? Big deficits, but inflation
has come down. The experience of the last
decade is that central bank balance sheet expansion
certainly need not generate a period
of excess inflation. And in fact, even with a
big balance sheet to be hard to get the
inflation that you want. There are limits to what
history can teach us when it comes to understanding
the economic situation right now. Even if
the economic stimulus doesn't result in higher prices
for consumers, many say that inflation is showing up
in the prices of other assets like the stock
market or the housing market. One of the
most interesting questions that we have right now
is the difference between the price inflation that you
and I see at the grocery store or at the
gas pump or when we're buying something. That's one measure
of inflation. But another measure of
inflation that is also very important is
asset price inflation. In other words, what's
happening to the stock market and what's happening
to credit spreads? I think we're looking
at a very significant increases in asset
price inflation. Inflation expectations are
another risk. People start thinking all of
the money supply is increasing. Inflation is going
to be higher. Then expected inflation
becomes high. Then you start asking for
increases in wages and prices. And these expectations
become what we call self-fulfilling. In the long term,
factors like globalization, technology and aging populations
all play a role in consumer prices. A weaker U.S. dollar or
a backlash against global supply chains, which have
been disrupted during the pandemic, could
create inflation risks. If you were to seal
the borders and literally cut off any imports and then
embark on this huge monetary and fiscal stimuli,
yeah, they could they could
create inflation. There's one more big risk
to inflation, and it comes with nine
zeros attached. Record high public debt. Trillions of dollars in
economic stimulus during the pandemic have increased
government debt at a rapid pace. In recent years, some
economists have argued in favor of deficit spending
to fund public investment. Though many debate
what effect this could have on inflation. Because government debts are
set in fixed dollar amounts, higher inflation makes
it easier to pay off those debts. Some worry that politicians
might put pressure on central banks to chase
higher inflation to help finance the growing
national debt. We need not worry too much
about the size of the Fed's balance sheet. What we need to be focused
on is whether the Fed will at the appropriate
moment have both the judgment and the
institutional independence to raise interest rates, even
if that might conflict with some other interests,
for instance, the interest of the
government of today.
Money printing will cause inflation when M2 velocity picks back up, the M2 supply has been steadily increasing while M2 velocity has been at ATLs
If you print a bunch of money and just give it to the same few every time & they just hoard it/spend it on goods cantillon insiders buy like stocks/property/gold or luxury goods then the money doesn’t circulate & average person becomes entirely priced out from these cantillon goods. Then the FED excludes these items from the CPI & says “look no inflation, we can’t find it”
If you print money and it circulates then it causes inflation. Milton Friedman used to say you would see the impact 18 months later.
Ketchup-Effect. Just wait for it.
Economists forgot about the 1970s. Stagflation bitches.