Afaq Chaudhary With inflation and the Feds response to it being the most widely accepted cause of our stock market ills, the question becomes what has caused the inflationary fires to ignite?
Inflation rates, although consistently increasing year over year for decades, have remained within the Feds 2% target rate for most of that time.
In the last year or so however, rates have been spiking. Figures vary on the exact rate of inflation, but we can comfortably say the inflation rate is, well, very uncomfortable.
When looking for reasons, many argue we go no further than 2051 Constitution Ave. in Washington, D.C., the address of the central bank of the United States, the Federal Reserve.
Among its many functions, it is the entity that controls our currency, the U.S. dollar.
The Feds, working in conjunction with Washington policy makers (but reportedly not beholden to them), decide when and by how much to reduce or increase the supply of money in our economy. This increase or decrease in the money supply acts to throttle up or throttle down the flow of currency in the system. The rate of flow, which can be thought of how fast money circulates between all of us, is called “money velocity”.
Couple higher money velocity with an increase in the amount of money created by Fed, the higher inflation will go.
In 2008/09, the Feds created trillions in new money, but much of that money went directly into the banking system instead of to the consumer. It is the reason we saw little inflation in the years that followed.
For CoVid-19 relief however, another plethora of trillions was created by the Fed, but this time much of it went directly to consumers. In fact, they have increased the total supply of U.S. dollars in the system by about 41% in just two years. An unimaginable increase without precedent.
Hence the inflation we are now witnessing.
One would think the economic experts working for Washington would enlighten administration officials as to the widely accepted cause and effect that government spending has on inflation.
Whether those discussions are ongoing is unknown, but if they are, it seems the education is falling on deaf ears.
Other central banks are also apparently not listening. Quebec has announced they will give $500 stimulus checks to about 6.4 million Canadians to help offset higher prices.
Following their lead, Washington, is discussing a bill to hand out “gas money” stimulus checks to Americans living in areas where gas prices are above $4 per gallon. The proposed amount is $100 PER MONTH, at an estimated cost of 168 billion.
The Senate also passed a one trillion dollar infrastructure bill in November of last year. Although final figures are a moving target as the differing political aisles duke it out, it’s a foregone conclusion more money is going to continue to gush out of Government coffers. Additional conversations around other assistant programs like food and rent assistance are also on the table. (https://www.whitehouse.gov/american-rescue-plan/)
One would think spending even more money on assistance checks to address consumer inflation which in part was caused by previous government spending might not be such a good idea. However the disconnect from both political parties on this fact seems palatable.
The question then becomes is why are the Fed and Washington deciding to spend even more money if previous spending got us here?
Won’t the additional spending just drive prices even higher, making an already bad situation worse?
One answer could be a November election is looming. If history shows us anything, it shows that during election time, the economy and how people are faring is a hot topic when ballots are cast.
Since the voting constituency knows not of the cause and effect of printing money causing inflation however, politicians don’t dare pull the apple cart away right when voters are deciding who stays and who goes.
Unfortunately, that probably means more free money in your mail box, and even nastier inflation to follow.
“Watching the markets so you don’t have to”
(As mentioned please use the below disclaimer exactly) THANKS (Regulations)
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, SDSU, and California Insurance License #0L34249. His website is moneymanagementradio.com, and was recently voted Best Financial Advisor in Nevada County. 530-559-1214