Friday, Fed Chairman Powell said, “The US would pull out of the crisis stronger and better, as we have done so often before.” Adding this: “Recovery is far from complete, and the Fed will continue to provide the economy with the support that it needs for as long as it takes.“
Many economists including our own Shayne Heffernan PhD and Bruce WD Barren plus much of the public are starting to worry about the massive increase in the money supply and the massive increase in deficit spending. With a public debt approaching $30-T and a money supply that has increased by 25% in the last 2 yrs, the worry looks justified, Yes?
But hang on, Modern Monetary Theory (MMT) says we have nothing to worry about, it says that since the US uses a currency that is not backed by anything other than faith in the government and its working people, more money can always be printed to pay off the debt. And the increase in the money supply will not necessarily lead to inflation.
The Big Q: Does a rapid growth in the money supply lead to inflation?
The Big A: Thoughtful economists would say Yes, citing the historical examples. In Y 1981, Milton Friedman and others convinced policy makers that it was the increase in the money supply that led to the double-digit inflation of the 1970’s. Mr. Friedman’s views were implemented. Inflation dropped dramatically.
Today we are concerned about future inflation.
In addition to the fast growth in the money supply, Mr. Biden’s war on fossil fuels has already driven up the cost of gasoline at the pump. Prices will go much higher as the coming high economic growth will fuel a large increase in demand for energy. That cost adds to the cost of food and everything in on the market shelves get there by truck, ship and plane from allover the world.
MMT says the large increase in the money supply is not a problem The money supply can increase as much as policy makers feel is needed, whether that money is used to finance government spending or whether it is used to simply increase the supply of money to the public.
They say that similar monetary and fiscal policy actions were taken during the last 10 yrs and no inflation followed. They say that the most recent data indicates that increases in the money supply will not lead to inflation, that means the inflation that they count, they do not count food and energy. And those number have increased dramatically just since the beginning of this year.
Mr. Barren notes this case in point: “In gasoline prices alone which is no longer taken into consideration for the calculation of inflation since 2014, Automobile Association of America announced last Monday that the national gas price average has increased to $2.86 a gallon, which is a 14% increase in 1 month for a gallon of regular fuel. However, analysts are predicting the $00.40 jump won’t be the peak of the price hike, as market factors continue to show an upward trend.
And, “With increased demand and tighter gasoline supplies, we are looking at more expensive pump prices with little relief in the weeks ahead” Plus, AAA said the average price of gas increased by at least 10 cents in one week in 20 states. Utah saw a 25-cent increase in the past 7 days.
MMT is dead wrong, Why? Because when the Fed takes action, which increases the money supply, the initial increase is eventually deposited into banks, which end up lending most of those funds. That creates a multiplying effect to further increase the money supply. As long as banks can make loans, the Fed’s initial increase can finally increase the money supply many times over. See, the multiplying effect: $1-T becomes at least $4-T.
Rising energy prices, a rapid growth in the money supply, huge government budget deficits and a potential capital shortage all point to a future inflation problem.
Those who support MMT reached conclusions that are simply not accurate. Continuing to print money and continuing to deficit-spend have consequences. The 1st is rapidly rising prices.
Friday, the benchmark US stock market indexes finished at: DJIA -234.33 to 32627.97, NAS Comp +99.07 at 13215.26, S&P 500 -2.36 to 3913.10.
Volume: Trade on the NYSE came in very heavy at 3..5-B on the NYSE and 7.4-B on the NAS.
- Russell 2000 +15.8% YTD
- DJIA +6.6% YTD
- S&P 500 +4.2% YTD
- NAS Comp +2.5% YTD
HeffX-LTN’s overall technical outlook for the major US stock market indexes is still Bullish with a Very Bullish bias at the wk ended 19 March 2021.
Looking Ahead: Monday investors will receive Existing Home Sales for February.
Have a healthy weekend, Keep the Faith!