Inflation is Here to Stay
You Don't get to Quadruple the Money Supply with No Consequences
The idea that inflation would ever be “transitory” is quite the farce indeed. It’s amazing Jerome Powell was able to utter those words with a straight face. Granted, I’ll acknowledge he admitted he
lied through his teeth was wrong.
Inflation, is quite obviously, here to stay for the foreseeable future.
Inflation hit 8.5 percent in April, the highest it has been since the early 80s. And it will almost certainly continue to climb.
When Covid hit, the Federal Reserve went wild and the money printer went brrr for most of 2020 and 2021. Something like 80 percent of all dollars in circulation were printed since 2020!
Indeed, as crazy as it sounds, banks don’t even need to hold deposits anymore. As the Federal Reserve itself notes,
“As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.”
And thus the trend for the money supply is straight up.
All things being equal, more money means more inflation. The main thing holding it back is if people don’t spend that money or don’t spend it very fast (this is called the “velocity” of money). This is what kept inflation down throughout 2020 and much of 2021.
As the economy improved though, the weight of those extra dollars is now being felt in the form of inflation. And so much money was printed that it’s highly unlikely to go away even if we do go into recession, as appears likely.
Once inflation takes hold it’s very hard to get rid of. Companies expect higher prices so they increase their prices. Workers expect higher prices for the goods they buy so they demand higher wages. Companies thereby expect higher labor costs so they increase their prices again. And so on and so forth.
In order to “break the back of inflation” in the 80s, the Federal Reserve had to increase interest rates into the teens! Indeed, by historical standards, the discount rate is still low. In fact, it will still be at the bottom of the normal range if it gets up to 2.8 percent by the end of 2023 as Jerome Powell stated was the plan.
There is just no political will to do anything like what Volker did in 1982 this time around. And add to that, there are concerns about the dollar’s hegemony as Russia, China and others try to break off into a separate block. If that happens, many of the dollars other country’s hold as reserves will come flooding back to the United States and increase inflation even more.
But even if that doesn’t happen (and I certainly hope it doesn’t), inflation is clearly here to stay. There’s just way too much money floating around for it to be otherwise.