The pandemic has cost billions to the economy, devastated thousands of small businesses and impacted the lives of billions of people. Yet, many in the establishment are celebrating.
They believe that the crisis has been averted. The pandemic-induced recession did not materialize. The wholesale economic collapse was averted.
Supposedly, this was all thanks to the Federal Reserve. Massive bond purchases and zero percent interest rates “saved us,” helping avert an economic collapse.
Going forward, the economy can only go up, right?
Wrong. The U.S. economy (and global economy, for that matter) are far from being out of the woods, as the worse effect of the pandemic has still not played itself out. (Article continues below.)
Unprecedented Money Printing
The Fed “saved” the economy using massive monetary stimulus, using near-zero percent interest rates and bond purchases. This lead to a massive expansion of the money supply.
In 2020, the M2 money supply increased by an astonishing $4 trillion. That’s a one year increase of 26%. To put that into perspective, that is the largest annual percentage increase since 1943, when the U.S. was fighting World War II!
Prior to 2020, the money supply only grew on average about 5.8% a year.
All that excess money has to go somewhere, right?
Sure enough — Consumer inflation is just catching up, with June CPI at an alarming 5.4%.
That is why many investors and economists have been sounding the alarm for inflation.
‘Nothing To See Here’
The Federal Reserve likes to downplay the effect of the money supply on consumer prices.
In February, Fed Chairman Jerome Powell stated that money measures have not been important determinants of inflation “for a long time.”
There’s some merit to the Fed’s story. The relationship between money supply and inflation is not linear. Other factors contribute to consumer prices, such as consumer demand and economic growth.
Economists use complex formulas like the “velocity of money” or “cost-push” and “demand-pull inflation” to try to capture all factors involved.
However, one thing is clear. In the long run, the money supply is clearly the most important factor behind inflation.
Consider this: Since 1900, the dollar has lost 94% of its value. The increased money supply has taken its toll.
The Asset Bubble
All the new money in the economy will impact prices sooner than later. However, there are signs that that is already happening. There’s a huge asset bubble that’s being inflated as the economy is still in a pandemic.
Tech stocks, meme stocks, even cryptocurrencies have experienced huge price spikes fuelled by excess money in the system. Some of these are starting to look like speculative bubbles.
Corporate debt is at an all-time high, as companies take advantage of low interest rates to refinance their obligations, or finance stock buybacks.
Fed’s Money Transfer To The Rich
It’s clear that the Fed’s money-printing already has a huge effect on the economy, even if new money has not yet hit consumer prices. But it will.
The wealthy will react to their “earnings” in the stock market by taking profits, paying themselves bonuses and spending on luxuries.
This “wealth effect” will slowly make money “trickle-down” to the real economy, making prices of consumer goods go up.
All of this will come at the expense of the bottom 90%. The poor will be hurt by inflation while getting no benefit from being invested in stocks. The Fed’s “stimulus” could be the biggest wealth transfer in history.
What is worse, even when the asset bubbles inevitably burst, prices won’t go back down to where they were before the bubble. All the trillions of new money won’t just disappear.
Some prices may even go up, as investors bid up commodity prices when looking for “safe havens” against inflation.
Inflation can come very rapidly when conditions are right. Sooner or later, the trillions in new money will make themselves felt. And there won’t be anything “transitory” about it.