Central banks and governments distributed an estimated $15 trillion of stimulus to shield their economies from the coronavirus pandemic - record sums that swelled balance sheets. The sum equates to about 17% of an $87 trillion global economy last year. As workers were furloughed and supply chains and factories shut down less goods became available on shelves, while simultaneously more dollars were being supplemented into the economy and personal savings accounts.
Inflation results when the amount of money printed increases faster than the creation of new goods and services. Money is a “token” of the wealth of a nation. If more tokens than new wealth are created, it takes more diluted tokens to buy the same goods, as consumers bid up prices of limited resources.
Inflation is caused by too much money chasing after too few goods.
As we enter the holiday season, people across the globe will begin their preparations. They will be confronted once more with the harsh reality of elevated prices due to continuing global inflation. In the U.S. this isn't a new phenomenon which has seen the inflation rate rise from a mere 1.4% in January of 2021 to 8.2% in September of 2022.
Americans are disillusioned and weary of excuses from the Biden administration and supporting members of congress. It began when inflation was resoundingly characterized as “transitory” in July of 2021, then Sen. Elizabeth Warren subsequently blamed greedy corporations. The most recent act of diversion was Russia's invasion of Ukraine and domestic inflation was renamed by President Biden in his remarks to “Putin’s price hike”. This inconsistency leaves many with the basic question. What is the true genesis of inflation?
“Inflation is an old, old disease. We’ve had thousands of years of experience of it. There is nothing simpler than stopping an inflation—from a technical point of view.”
~ Milton Friedman
Economist Milton Friedman was famous in proclaiming, “Inflation is always and everywhere a monetary phenomenon.” In his 1980 release of Free to Choose: A Personal Statement he delivers a dismissal of commonly blamed characters of inflation that are still eerily relevant today.
“Government officials always find some excuse - greedy businessmen, grasping trade unions, spendthrift consumers, Arab sheikhs, bad weather, or anything else that seems remotely plausible.”
The blame game by politicians is a long-standing tradition to dissuade the public from discovering the true culprit, government.
Friedman blames inflation on rapid monetary growth that exceeds output. Thus, the influx of more dollars creates artificial demand for the fixed amount of goods and services available. In addition, when more dollars are in circulation they lose value, which greatly impacts those in our middle and lower classes. The money supply since February of 2020 has grown by a whopping 40% to finance widespread federal relief efforts during the pandemic that has continued after the end of lockdowns and the re-opening of society.
Steep monetary growth has been a necessity for the U.S. current administration to finance large endeavors without raising taxes, such as the Build Back Better Plan coming in at $2.4 trillion dollars, with prospective extensions of another $2.5 trillion dollars. Friedman asserts that monetary growth and fiscal recklessness work hand in hand.
Financing government spending by increasing the quantity of money is often extremely attractive to both the President and members of Congress. It enables them to increase government spending, providing goodies for their constituents, without having to vote for taxes to pay for them, and without having to borrow from the public.
The only cure to slowing inflation, in Friedman’s point of view, is to reduce the increase of monetary growth. Confidently writing that “a reduction in the rate of monetary growth is the one and only cure for inflation.” Fiscal policy, in and of itself, is not as much a contributor to inflation as monetary policy—but when fiscal policies are primarily financed through monetary means is when the two become interdependent.
Friedman writes, “Just as high government spending is one reason for excessive monetary growth, so lower government spending is one element that can contribute to reducing monetary growth.”
“The only cure for inflation is to reduce the rate at which total spending is growing.” This cure involves a temporary side effect. There is no way of slowing down inflation that will not involve a transitory increase in unemployment, and a transitory reduction in the rate of growth of output. But these costs will be far less than the costs that will be incurred by permitting the disease of inflation to rage unchecked.”
The central bank must act prudently enough to contain widespread economic harm to the U.S. and global economies. The Fed's potential policy error could destroy trust in capitalism, leading to social upheaval as the economy potentially tips into a recession.
So the rich guy who loses 30%, he's still rich, right? But the poor guy who's working in an hourly job that loses that job, he's going to say: "Capitalism is broken, it's not working, and this whole system has to go. That is how social unrest and revolutions gain momentum.
Unfortunately, Biden’s recent announcement of a new $5.8 trillion budget, doesn't suggest that this administration will adopt the fiscal restraints necessary to achieve a resolution.
As Federal Reserve chairman Jerome Powell repeatedly disregards calls for reduction in the monetary growth in exchange for nominal increases in interest rates, Americans and world economies can expect inflation to go unresolved until new policies are established.
The next time politicians or media pundits shift the blame of inflation to anything other than misguided monetary policy, remember the words of Dr. Friedman,
“It is tempting to believe that inflation is a temporary and mild matter produced by unusual and extraneous circumstances, and that it will go away of its own accord- something that never happens.”
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