EC Inflation Is A Monetary Curse

Remarkably, in a speech on monetary policy given at the Jackson Hole conference last Friday, Jay Powell never mentioned money, money supply, M1 or M2. With money supply expanding at a record pace to fund both QE and intractable budget deficits the omission is extraordinary.

The FOMC (the rate setting committee) appears to no longer take the consequences of monetary expansion into account. But the fact is that rising consumer prices caused by monetary expansion have driven real rates sharply negative and are leading to pressure for higher interest rates.

This article looks at the consequences of policies which combine the maintenance of a wealth effect by juicing markets with QE, and funding enormous government deficits, which are now beyond control. A flight out of foreign-owned dollars and dollar-denominated financial assets, which currently total over $32 trillion, is becoming inevitable.

Will the Fed respond by increasing its QE support for financial markets, while resisting the pressure of rising interest rates? If so, there is no surer way to destroy the dollar.

The lessons from history combined with sound economic analysis tell us that markets will reassert themselves over the Fed, and for that matter, over all other central banks which have embarked on similar monetary policies.

Gold is the ultimate hedge against these events and their consequences.


Last week, in his Jackson Hole speech Jay Powell grudgingly admitted that prices might rise a bit more than the FOMC previously thought. But it was too early to conclude that policies should be adjusted immediately. He said:

“Over the 12 months through July, measures of headline and core personal consumption expenditures inflation have run at 4.2% and 3.6% respectively— well above our 2 per cent longer-run objective. Businesses and consumers widely report upward pressure on prices and wages. Inflation at these levels is, of course, a cause for concern. But that concern is tempered by a number of factors that suggest that these elevated readings are likely to be temporary. This assessment is a critical and ongoing one, and we are carefully monitoring incoming data.”

In other words, with prices rising at over double the 2% target, there’s nothing to worry about. But be reassured, the Fed is on the case.

This was followed by:

“Policymakers and analysts generally believe that, as long as longer-term inflation expectations remain anchored, policy can and should look through temporary swings in inflation. Our monetary policy framework emphasises that anchoring longer-term expectations at 2 per cent is important for both maximum employment and price stability.”

In other words, because inflation is always 2 per cent and Humpty-Dumpty insists it is so, markets will return to the 2 per cent target. Incidentally, when someone invokes belief, it is either the product of faith or lack of knowledge. This is why politicians cite faith a lot, and we should be wary when it is a justification for monetary policy.

There is, of course, one glaring problem with all this as Powell admits before dismissing it: “businesses and consumers widely report upward pressure on prices and wages”. There is an associated problem, an enormous elephant in the room that no official seems to be aware of, which independent analysts such as John Williams at point out, and that is if you strip out all the changes in a statistical method that have deliberately reduced headline price rises since 1980, you find that according to an unadjusted CPI(U), prices are now rising at over 13% annualized.

Perhaps we should give Powell one out of ten for courage for participating at Jackson Hole, while zero points must be awarded to Christine Lagarde and Andrew Bailey, both having refused to take part in the symposium when at other times they would surely have welcomed the chance to be in the limelight on the global monetary stage. We are left wondering why they preferred not to justify their monetary policies in such a forum.

But if Powell gets one point for at least appearing, he gets at least nine out of ten for evasion. A word-search of his speech reveals why. It is headlined about monetary policy. But money was only mentioned once, and that was in the title of one of the references at the end. Not even when discussing longer-term inflation expectations was money mentioned. And word searches for M1 and M2 show nothing. The Fed’s monetary policy does not appear to involve money.

To be clear, the chart in Figure 1 has nothing to do with rising prices, according to Jay Powell.

Figure 1 shows narrow money supply before it was amended to include former categories of broader M2 money last February, rendering it useless for comparative analysis. Narrow money supply is going off the scales. Yet at Jackson Hole it was never mentioned, except in a footnote. Equally incredible is the gullibility of the investment establishment knowing that money does matter yet was drawn into the Fed’s non-monetary narrative.

The relationship between prices and money

Like the child in the fable who observed the emperor had been conned into wearing no clothes, a child today with an elementary grasp of arithmetic will understand that if you increase the quantity of something, each unit will be worth less. Today’s masters of the monetary universe seem unaware of the fact. They have written many erudite books and articles, made speeches as we saw last week, in ignorance of or wishing away monetary facts.

The consequences of debasement are therefore ducked. Interventionists dismiss the Cantillon effect, whereby prices increase in the wake of the new money being spent into circulation. Have they even heard of it? As an unarguable fact, it should be indisputable. And clearly, rising prices are a consequence of the massive increase in circulating currency evidenced in Figure 1 above, and not due solely to an imbalance between production and consumer demand which will correct in time, as Powell claimed at Jackson Hole.

Economic dislocation is part of and at the same time an additional factor to monetary expansion behind price increases. It arises from monetary inflation distorting markets, which continue to be disrupted by the covid pandemic. Covid-related disruption will continue into the foreseeable future, most noticeably due to logistical foul-ups, trading nations going in and out of lockdowns and other related restrictions on commerce. But at base, increases in the general level of prices occur as newly issued currency enters circulation.

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Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information ...

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