TRILLIONS OF DEFICIT SPENDING MINUS BILLIONS OF QUANTATIVE TIGHTENING EQUALS MORE INFLATION

I find it very interesting that the media gurus, who are reacting to the sharp reversal in the rate of inflation as evidenced in the recent CPI number (2/13/2024), are concentrating on the symptoms of the problem and not addressing the root cause.  Yes, the January CPI number of 0.3% was significantly higher than projected and yes, the core CPI (which excludes food and energy) of 0.4% indicates that the decline in inflation experienced over the past quarter, which has been been touted by all of the hopeful stack market analysts, has come to a grinding halt. In fact, the core rate has been noticeably higher than the headline rate for months, which is a harbinger of higher than trend inflation in the short to medium term, especially now that global events could easily cause the cost of both food and energy to reverse trend and increase significantly.  The stock market analysts whose prognoses have been for as many as six rate cuts by the Federal Reserve this year are now getting a reality check.

The basic underlying cause of the problem is the amount of money floating around in the economy.  The aggressive rate increases by the Fed over the past year in addition to quantitative tightening has absorbed a lot of money that was recklessly pumped into the economy by the Biden Administration in the name of pandemic relief well after the pandemic was over.  GDP has shown a surprising amount of resiliency during this period of rate increases by the Fed, but the reality is that government spending has been at far too high a percentage of those recent favorable GDP numbers for over a year, which has negative long-term implications in virtually all circumstances. The return to increased inflation fears should not be a surprise to any competent economist, given that the Biden Administration’s deficit spending, pumping of trillions of dollars into the money supply, has been outweighing the Federal Reserve’s billions of dollars of quantitative tightening on an ongoing basis.  The concept of unlimited government spending, championed by the proponents of “modern monetary theory”, is akin to proposing that one should keep spending until he or she get rich and that one should keep eating until he or she gets skinny. Needless to say, that is all nonsense. 

Lately, the Democrat Party and their Keynesian economic advisors have been guilty of ignoring the monetarists’ (Milton Friedman’s and the Supply Siders’) logical position that excess money in the economy is the root cause of inflation.  It really is that simple, especially in the present environment where the amount of excessive money sloshing around the economy is clearly problematic.  It is my economic opinion that the supply side policies will be most effective during periods, such as the present situation, where Keynesian ‘theology’ has functionally steered the American economy into a demand side imbalance.  Given the Keynesian bias of the Federal Reserve and the excessive spending of the present Democrat party, the path to “normalcy” in the American economy has been and will continue to be onerous and the unsustainable path of public debt will continue unabated.  This will continue to be the case until federal spending is geared to the wellbeing of the population and not to the benefit of special interest groups, and until agenda driven fiscal policy does not directly impede the efforts of the Federal Reserve to contain inflation below its 2% target rate. Until economic growth begins to reflect a stable supply and demand balance, supply side policies will continue to be the most effective economic policies on the federal level.  Once a reasonable balance is achieved between supply and demand, fiscal policies of a more balanced nature (policies that drive both demand and supply) can be expected to better address optimal long run economic growth.  The reality of higher rates for longer may not be reflected in the stock market as analysts hope that the recent higher than expected CPI number will not repeated and because the American stock markets are considered a safe haven by foreign investors.