Inflation Is Always and Everywhere a Monetary Phenomenon

Commentary The fiscal response during the COVID-19 recession has been unprecedented. Passage of the CARES Act pumped more than $2 trillion into the economy. CARES Act II will likely keep the pump primed. But for this fiscal stimulus to have its intended impact of fueling the nascent recovery, the government needs a white knight. That knight has taken the form of Jerome Powell, chair of our nation’s central bank—the Federal Reserve (Fed). If it weren’t for the Fed being at the ready to sop up all those new government bonds being sold to fund the growing national debt, the fiscal impact of the CARES Act and probable CARES Act II would be muted. It’s not a coincidence that as U.S. government sales grew by more than $2 trillion to fund the CARES Act, so too did the Fed’s balance sheet as it purchased all those bonds. This unmistakable evidence of the remarkable coordination between the fiscal and monetary arms of our government points conclusively to what economists technically call “monetizing the debt.” An apt metaphor for this technical term is “running the printing press.” In light of the total absence now of any inflationary pressure, one might wonder what’s wrong with keeping that press going. If the government can provide fiscal relief during an economic crisis with the Fed’s full cooperation and even encouragement without any negative consequences, then why not party on? The answer to that question lies in the difference between the short run and the long run. It’s true in the short run, with the nation reeling from the devastating economic effects of the pandemic, that the government can spend and spend without inflation rearing its head. With unemployment so high and investors fearful of the future, additional government spending is offsetting lower private spending. Even though one kind of spending replaces another, aggregate spending stays the same. So there’s no pressure on prices. That short-run mindset explains why the Fed will keep the party’s punch bowl generously spiked. In the long run, however, the scenario changes. As the recovery continues and COVID-19 begins to dim in our collective memory, people will start to open up their pocketbooks. Unemployment will decline, and investors seeing the beauty of such historically low interest rates will see a brighter world for their best-laid plans. Eventually, the private sector joins the government in its spending spree, and prices begin to edge up. That’s when the Fed is likely to drain the punch bowl. But by then, it’s usually too late. As the great economist and Nobel Laureate Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon.” But as a former student of his, I know that professor Friedman would add that the relationship between monetary growth and its eventual impact on prices is a long and variable one. Recent research at the A. Gary Anderson for Economic Research at Chapman University bears him out. Since the end of World War II, there have been four periods when year-to-year growth rates in the monetary measure, M2, exceeded 13 percent. As World War II was drawing to a close, for example, the Fed was spooked by the negative effects on the economy of a steep drop in defense spending. So, in late 1944, the Fed turned on the spigot, increasing M2 at a year-to-year rate that hit 20 percent. At first, nothing happened, but six quarters later (a year and a half), inflation started to increase, moving up from around 2.5 percent to almost 20 percent one year later. Fighting a recession in the early 1970s, the Fed increased M2 to almost 14 percent. During that monetary binge, prices actually declined. But nine quarters after, M2 started increasing; inflation began to increase from 3 percent in the third quarter of 1972 to 12 percent by the end of 1974. This pattern repeated itself in a mirror-like way in another monetary-price cycle in the mid-1970s. The fourth instance when M2 growth exceeded 13 percent did not occur during the Great Recession as one might suspect but actually had to wait until 2020 during the early months of the current pandemic. But when it happened, it did so with a vengeance, as M2 shot off at a 20 percent rate of growth. So far, like in all previous episodes of extreme forms of monetary stimulus, prices haven’t moved. But we’re still in the short run. A regression equation we’ve estimated that covers 1970 to the current period shows that, on average, there’s a nine-quarter lag before the long-run kicks in. Such a lag suggests that inflation won’t show its face until late 2021 or early 2022. Will fear of that deter the Fed from “running the printing press?” Hardly. As another great economist of the 20th century, John Maynard Keynes, said, “In the long run we are all dead.” James L. Doti is president emeritus and professor of economics at Chapman University. Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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This article was contributed by Tom Beck of Portfolio Wealth Global.  Are you waiting for Jerome Powell to pull a RABBIT out of his HAT? There’s a presidential debate tentatively scheduled for the 29th, so don’t expect the central bank to MEDDLE in the MARKETS between now and then, since there’s absolutely no chance they want to be appearing to be TAKING SIDES. For the next few weeks, we have freer markets, so PRICE DISCOVERY will be real. The Federal Reserve won’t do much to offer artificial support. We saw a run to cash, but institutional money looks to be COMFORTABLE with buying the DIP at this point, with the S&P 500 in correction mode (-10%), on top of the NASDAQ 100. Courtesy: The global markets have GOTTEN USED TO government debt rising perpetually, so no one is TOO ALARMED by this, but when global GDP is at 252%, the REAL MEANING of it is that there are GUARANTEED VICTIMS in the sovereign restructuring in the years to come. Portfolio Wealth Global believes that both gold’s and silver’s PUKE yesterday shows that there’s BIG SUPPORT at the $1,900/ounce area, so we are eager to see if a NEW UPTREND is starting, after this BLOODBATH WEEK. The majority of people are vaccine-biased, which means that they won’t return to FULL CONFIDENCE until we “beat the corona.” Many industries are GOING BACK 5-10 years and even worse than that, in terms of demand for their products and services, facing massive default waves and I’m telling you that this is where BIG MONEY will be made. Hoteling, real estate, aviation, office space, healthcare – you name it and it’s in REBUILDING MODE. What are you doing to capitalize on this? Consumers, corporations, and governments need you to innovate and you can make a fortune on the way. Courtesy: EVERYONE is betting on technology, but the value is in the BEATEN-DOWN sectors. The markets have SHAKEN OUT the people who aren’t ready for volatility, but September isn’t over, nor is this SECOND WAVE scare. Personally, I follow our WATCHLISTS, which have come out in the past few months. The first is from late March and delivered HUGE RETURNS – click HERE! The second came out right before the June 8th peak – click HERE! The third came out JUST RECENTLY to address the September massacre – click HERE! Just a few days ago, when NASDAQ peaked, we published this (so timely) – click HERE! FEAR LEVELS are up; this is when contrarians act. We’re like nocturnal animals – we wait for everyone to sleep and then WE HUNT. I feel the same way about gold; this week’s dump to just over $1,900 took care of the LEVERAGED TRADERS. Courtesy: It’s LITERALLY IMPOSSIBLE to be looking at these charts and not allocate funds into precious metals. I ask people from the U.S., from Europe, from Central America, from Asia, and from Australia; the answer is the same: NO TRUST in government. Gold is essential and the fact remains that the uptrend is IN PLACE. President Trump is Breaking Down the Neck of the Federal Reserve! He wants zero rates and QE4! You must prepare for the financial reset We are running out of time Download the Ultimate Reset Guide Now!


Powell, Mnuchin Mull Best Way To Boost Aid To Small Businesses

Top U.S. economic policymakers opened the door on Tuesday to further aid for small businesses hit by the coronavirus pandemic, but Federal Reserve Chair Jerome Powell said it probably should not be funneled through the central bank. Stung by criticism that the Fed’s Main Street Lending Program had been ineffective in hitting small businesses, Powell told the House Financial Services Committee there was little demand for central bank loans of less than a million dollars. If Congress wants to get smaller amounts of money to smaller businesses, it should use something like the Paycheck Protection Program adopted earlier in the pandemic, and spare the Fed the difficulty of underwriting loans to “hundreds of thousands” of small firms, Powell said in testimony to the Democratic-controlled committee. “Trying to underwrite the credit of hundreds of thousands of small businesses would be very difficult,” Powell said. PPP, which offered loans that would be converted to grants under certain conditions and did not involve strict underwriting of business applicants, “is a better way to approach that space,” he said. Earlier in the same hearing, Treasury Secretary Steven Mnuchin said he was willing for the Fed to loosen the standards of the Main Street program and allow loans as small as $100,000, and that he expected it to suffer some loan defaults. The current loan minimum for the program is $250,000. “We do expect to take losses and we are working closely with the Fed” to get more money flowing through the Main Street program, Mnuchin said. Of a potential $600 billion, the program has processed loans of about $2 billion since beginning in June. But Mnuchin also said he was open to a further PPP-like program, or other follow-up efforts targeted at restaurants and small businesses in industries that have been particularly hard hit by the pandemic and benefited less from the first months of the economic recovery. IMPROVEMENT AMID RISKS Powell said the economy has shown “marked improvement” since the pandemic drove the country into recession. Still, the path ahead remains uncertain, and the trajectory of both the virus and fiscal policy pose particular risks. Noting the rebound in jobs and household spending since the economy cratered in the spring and early summer, Powell said the United States still remains far from where it was, and “a full recovery is likely to come only when people are confident it is safe to reengage in a broad range of activities” with the coronavirus under control. A stalemate in Congress over further aid programs, including the enhanced unemployment benefits that helped sustain household incomes since the spring, is adding to the uncertainty. Congress passed the $2.3 trillion CARES Act aid package in late March as the foundation of the federal government’s economic response to the pandemic. It authorized the Treasury to fund an array of Fed lending and credit programs, including the Main Street program. Lawmakers have been concerned there has been limited use of that program even as other Fed actions have ignited a stock market rally that helped investors recoup earlier losses. Meanwhile, joblessness remains elevated and roughly 29 million people are claiming some form of unemployment insurance on a week-to-week basis. The state of the economy and the path of the pandemic are central issues in the Nov. 3 presidential election. The pandemic dealt a death blow to the longest-ever U.S. economic expansion when widespread business shutdowns and stay-at-home orders triggered the largest drop in activity since at least World War Two. The Fed responded by cutting interest rates to near zero, ramping up bond purchases and launching nearly a dozen emergency credit facilities, several with Treasury’s backing. Tuesday’s hearing, the first of three featuring Powell this week, was chaired by Democratic Representative Maxine Waters of California. On Wednesday, Powell is due to appear before a hearing of the House Select Subcommittee on the Coronavirus Crisis chaired by Democratic Representative James Clyburn of South Carolina. On Thursday, Powell and Mnuchin will testify before a hearing of the Senate Banking Committee chaired by Republican Senator Mike Crapo of Idaho. (Reporting by Dan Burns in Connecticut, Ann Saphir in Berkeley, Calif., and Andrea Shalal and Howard Schneider in Washington; Editing by Matthew Lewis and Paul Simao)

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Fed’s Powell Sees a Long Road To ‘Maximum Employment’

The way Federal Reserve Chair Jerome Powell sees it, the U.S. labor market has a long way to go to meet the central bank’s maximum employment goal and a lot of boxes to tick along the way. In his most extensive effort to explain how the Fed will measure progress toward a goal prioritized last month under the Fed’s new framework, Powell was clear on Wednesday that he and other policymakers were not focused on any single number, such as the unemployment rate. “Maximum employment is not something that can be reduced to a number the way inflation can,” Powell told a news conference after the Fed announced its commitment to keep interest rates low until they are convinced of the job market’s strength and that inflation is on track to run above the Fed’s 2% goal for some time. “It’s a range of factors,” he said. “We’re not looking at a rule. We’re looking at a judgmental assessment.” Powell laid out a menu of factors – including wage growth, workforce participation and disparities in minority joblessness relative to whites – that must be satisfied before the Fed would view the economy at maximum employment, and thus even consider raising interest rates. But the Fed chief also said the central bank was limited in how much it could do to help close some of those gaps, suggesting it may be up to Congress to roll out policies that can help disadvantaged workers land jobs or help to address income inequality. “We would like to get back to a strong labor market where wages are moving up, where people can find work, where labor force participation is holding up nicely,” Powell said. “That’s what we’d really love to get back to.” Nonetheless, the labor market is starting to improve, as seen by the drop in the unemployment rate to 8.4% from a coronavirus pandemic high of 14.7%, Powell said. The number of Americans filing initial claims for unemployment benefits also dropped from very high levels at the height of the crisis, he pointed out. Yet the number of people seeking jobless benefits for the first time each week is still about five times as high as it was before the pandemic, Powell said. “The overall picture is clear,” Powell said “And that’s that the labor market has been recovering but that it’s a long way, a long way from maximum employment,” he said. (Reporting by Jonnelle Marte; Editing by Dan Burns and Peter Cooney)

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