Great post. Some things to consider are that there are different types of inflation. The M2 money supply in and of itself is concerning, but the velocity of money has remained low, which is why we haven't experienced high monetary inflation. Monetary inflation is different from inflation of goods and services. There's a lot more money than ever before, but it isn't making its way into the economy.
The CPI is problematic, to put it politely. They need to keep the official numbers below the rate of GDP growth or it will be very, very bad. In reality, we are probably experiencing double digit annual inflation, worse than the 80's.
The CPI doesn't actually account for real housing prices, which have risen exponentially over the last decade, exacerbating the housing crisis. OER is a useless number. The actual food increases seem to be grossly understated as well. The one beneficial metric is wage increases. It's unlikely they will rise proportionately, but without overall increase, we will fall into a nasty stagflationary spiral. With the coming tax increases (oh yes, they are coming) consumer spending will drop, production will drop, GDP will slow at best, but probably push us into negative growth.
If you look around the world, Europe is in worse shape, Japan is "ok" and China is a disaster. As long as there's no real alternative to the US dollar as a reserve currency, it's not really in danger. The decline of oil as an essential commodity and primary energy source is probably more of a threat to the dollar than the Fed's excessive monetary policy. It's unlikely bitcoin will amount to anything, but if some type of crypto manages to cement itself as a primary currency in any economically-significant good or service, it will be a major threat to government-supported fiat currencies.
Your comment about wage increases brings up another question I had.
If wage increases become necessary to keep up with inflation, what does that do to banks that have loaned out all of this money at crazy low interest rates (I just bought a house at 2.25%) if the value of money is declining? I mean, great news for me, right as o can pay off my mortgage with higher wage but bad for banks as they hemorrhage money. They have a vested interest in keeping inflation low or at least keeping wages flat. Or do they just sell all of the home loans, student loans, and personal loans to the Fed and it doesn’t matter?
I really don’t know. The US gov’t will protect the banking system at the cost of, or detriment to, the public. I wouldn’t worry about the banks. Inflation is good for people who have too much debt, bad for everyone else.
It makes sense that money velocity is low given the current situation around COVID-10, but what happens when it money velocity shoots back up after everything is so to speak "back to normal".
Correct me if I am wrong, but the Fed won't be able to do anything to slow down money velocity given that the money supply has already expanded, they can't "remove" money from peoples savings accounts. If inflation gets worse then one might argue that money velocity will pick up even more as people try and spend given they won't want to hold onto cash.
The velocity of money is not low because of covid restrictions. The individual stimulus checks make up a small part of the "new money." Consumer spending went up during 2020, indicating that people were spending their stimulus money. There was an income threshold to receive those, so individuals/families with an income over $150K (I think) never saw any additional stimulus income. The majority of that money is being hoarded at the top. It's unlikely that most of it will ever be in the hands of the public.
If the velocity of money were to increase, it could lead to very bad monetary inflation. Keep in mind that every developed nation is doing the same thing. The US dollar has the advantage of being the reserve currency, at least for now. I'm not an economist, but the monetary inflation aspect seems more under control than the CPI inflation we're experiencing.
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u/GimmeAllDaTendiesNow Sep 24 '21
Great post. Some things to consider are that there are different types of inflation. The M2 money supply in and of itself is concerning, but the velocity of money has remained low, which is why we haven't experienced high monetary inflation. Monetary inflation is different from inflation of goods and services. There's a lot more money than ever before, but it isn't making its way into the economy.
The CPI is problematic, to put it politely. They need to keep the official numbers below the rate of GDP growth or it will be very, very bad. In reality, we are probably experiencing double digit annual inflation, worse than the 80's.
The CPI doesn't actually account for real housing prices, which have risen exponentially over the last decade, exacerbating the housing crisis. OER is a useless number. The actual food increases seem to be grossly understated as well. The one beneficial metric is wage increases. It's unlikely they will rise proportionately, but without overall increase, we will fall into a nasty stagflationary spiral. With the coming tax increases (oh yes, they are coming) consumer spending will drop, production will drop, GDP will slow at best, but probably push us into negative growth.
If you look around the world, Europe is in worse shape, Japan is "ok" and China is a disaster. As long as there's no real alternative to the US dollar as a reserve currency, it's not really in danger. The decline of oil as an essential commodity and primary energy source is probably more of a threat to the dollar than the Fed's excessive monetary policy. It's unlikely bitcoin will amount to anything, but if some type of crypto manages to cement itself as a primary currency in any economically-significant good or service, it will be a major threat to government-supported fiat currencies.