Pay no attention to that printing press behind the curtain.
Inflation, created in the capital but felt across the country, finds Washingtonians trying to dissuade Americans from believing its existence. A parlor game among political officeholders and their journalistic boosters sees them gaslighting anyone noticing that Hey, this sandwich still tastes like roast beef but its cost feels like filet mignon. The New Republic, for instance, titles a piece by a pod person masquerading as Bruce Bartlett: “Washington’s Inflation Hysteria Is Fueled by Corporate Greed.”
In reality, government greed fuels inflation.
The Federal Reserve’s balance sheet more than doubled in the last 18 months. It now approaches $8 trillion. In other words, the Federal Reserve owns an amount worth about 36 percent of the U.S. economy.
The vast majority of the central bank’s holdings revolve around securities purchased to fund the federal government. When the treasury needs money, it no longer turns to China or Japan or individual bond-market investors. The amount demanded rises above what the market can bear and with the return on a 10-year Treasury note at 1.6 percent — a full point lower than the consumer price index used to gauge the symptoms of inflation — how could the federal government turn to suckers investors to fund its largesse? Nobody wants a guarantee of lost value on an investment even for the privilege of giving the government money, especially an investment whose direct byproduct further devalues the investment (and the currency). Instead, the Fed cranks its printing presses — actual, digital, and otherwise — to monetize deficit spending.
The downside of such a rapid expansion of the money supply involves a devaluing of the dollars in our pockets. We see evidence of this at the cash register, which merely delivers the bad news created by central bankers. Don’t kill the messenger.
Gasoline prices rose 9 percent during March and 22.5 percent over the last year. The price of 9-millimeter ammunition has tripled since 2019. Lumber prices tripled since last year. Prices for used vehicles increased since March of last year by 9.4 percent, tobacco by 6.3 percent, and by 5.4 percent protein pals meat, fish, poultry, and eggs.
Supply-and-demand factors within those sectors help explain the spikes just as those within the travel industry help explain the sharp dip in prices for airline tickets. But the micro trends should not obscure the macro one. The federal government’s demand for the creation of new money to fund various pandemic bailouts and its other gargantuan budgetary concerns devalues our money. Did ExxonMobil raise gas prices in response to increased demand, or did the Federal Reserve dilute the dollar that pays at the pump in response to increased demand from Congress for money to fund its schemes?
Both, of course, occurred.
The Fed downplays the problem for self-serving reasons. The central bank features a dual mandate of maximum employment and stable prices, which a decade or so ago it pegged to 2 percent inflation. March witnessed the largest jump in month-to-month consumer prices in almost a decade, and the annual consumer price index landed 30 percent above at 2.6 percent where the Fed says it wants it. But chairman Jerome Powell doubts that high inflation sticks around on a “sustainable basis.” He said on 60 Minutes this week, “We do have the ability to wait to see real inflation, and that’s what we plan on doing.”
But real inflation occurs when the money supply overexpands, not when we experience sticker shock. The latter merely serves as a symptom of the former, and in cash-hoarding and business-banning situations — the imperfect storm that characterized the pandemic — inflation takes time to become apparent in the checkout line.
Now that Washington wants a $2.25 trillion bill that includes a leftist wish-list under the polling-popular banner of “infrastructure,” the votaries of big government seek to convince that big government’s demands on the federal reserve do not influence inflation at all. Given that the Treasury revenues fell $660 billion short of outlays in March and the deficit for the first half of the fiscal year reached $1.7 trillion, this case seems tough to make.
The laws of supply and demand apply not merely to gasoline and lumber and housing but to money, too. When central bankers expand the money supply so rapidly as to more than double the securities holdings of the Federal Reserve since September of 2019, this necessarily devalues the money in our accounts, under our mattresses, and in our old shoe boxes.
“There is one and only one basic cure for inflation,” Nobel Prize–winning economist Milton Friedman imparted 44 years ago, “slowing monetary growth.”
The first step in slowing monetary growth involves reining in the fiscal side. The Fed sugar-rushed the money supply because the politicians demanded money that neither the taxpayers nor securities investors would or could give them. They need more money to fund the misnamed infrastructure bill. So they need to lie about the existence of inflation and what actually causes it.
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