EC The Fed’s Inconvenient Truth: Inflation Is “M.I.A.”

The Fed’s Inconvenient Truth: Inflation Is “M.I.A.”

The amount of money in the US economy is 25% higher than it was at the start of 2020, eclipsing any pace of money growth seen since the Federal Reserve was established (1913)” RB Advisors Deputy CIO Dan Suzuki.

In recent weeks we have seen a non-stop flow of ominous statements like the one above.

The author is 100% factual and it should be a cause for deep concern. Historically, such surges in the money supply were often met with significant inflation.

Fed Inconvenient Truth, The Fed’s Inconvenient Truth: Inflation Is “M.I.A.”

While the sharp increase in the money supply provides context to the depth of our economic problems, our inflation warning bells are not ringing, at least not yet. Here is why.

What is Inflation?

Inflation, or aggregate price increases, results from economic activity, along with the amount of money and its velocity.

A famous economic formula called the Monetary Exchange Equation uses those factors to create a mathematical identity that precisely determines the inflation rate.

We co-authored an article with Brett Freeze entitled Stoking The Embers of Inflation. The article went into great detail about the monetary exchange equation.We summarize a few key points here:

Per the inflation identity, the rate of inflation or deflation (%P) is equal to the rate of money growth (%M), plus the change in velocity (%V), less the rate of output growth (%Q). 

%M – As noted earlier, the change in the monetary base is a direct function of the Fed’s monetary policy actions. To increase or decrease the monetary base, the Fed buys and sells securities, typically U.S. Treasuries and more recently Mortgage-Backed Securities (MBS).

%V – Velocity is nominal GDP divided by the monetary base (Q/M). Velocity measures people’s willingness to hold cash or how often cash turns over. Lower velocity means that people are hoarding cash, which usually happens during periods of economic weakness, credit stress, and fear for banking institutions’ going-concern.

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Laurent Eliane 1 month ago Member's comment

I don t deny the article is well explain and detailed. But...even if a part is in a hole, covid change consumer habit from restaurant to cooking..etc. USA has still the brain a bit in the Trump era. I mean inside a wall!

But, factors like climate change on the price of food (I am sure you follow wheat, rice, etc) and the declining usd versus nearly all currencies (imported inflation)...these factors, even if velocity is not part (yet), the reality is different or will be soon. Unless a crash

Adam Reynolds 1 month ago Member's comment

Good points.

William K. 1 month ago Member's comment

The reason that many of us expect inflation is because adding a great deal of cash to the economy has a history of causing rampant inflation. But these are different times indeed, and if we are wrong about the impending inflation that would be very good. So thank You for giving us an explanation of why the results could be different this time.

Texan Hunter 1 month ago Member's comment

Thanks for the share, Michael.