And still the money supply = inflation myth survives

You see it all the time. Even my friends at Modern Monetary Theory (MMT) believe it: Inflation is caused by too much money in the economy. It must be correct intuitively, because the myth persists. For instance:
Business Insider
Inflation could spike to 20% in the next few years as the US money supply explodes, says Wharton professor Jeremy Siegel 5/15/2021
wdaniel@businessinsider.com (Will Daniel)
Wharton professor Jeremy Siegel said inflation could spike to 20% in the next two or three years due to “unprecedented” fiscal and monetary stimulus and an explosion of the US money supply.
“I’m predicting here that over the next two, three years, we could easily have 20% inflation with this increase in the money supply,” Siegel said in a recent interview with CNBC. Siegel went on to criticize Fed chair Jerome Powell for not acting to quell inflation in the near term. The Wharton professor called Powell the “most dovish chairman” that he’s ever seen and said that the Fed chair’s stance could “be a problem down the road.”
Fiscal stimulus adds growth dollars to the economy via increased government spending and/or lowering of taxes. In short, it’s increased deficit spending. The purpose is to increase economic growth and employment via increases in the money supply. Fiscal stimulus is done by Congress and the President. It has nothing to do with the Fed. Monetary stimulus is done by the Fed. It also adds growth dollars to the economy, along with reduced interest rates. Professor Siegel does not criticize the federal government for its fiscal stimulus (deficit spending) that has added much-needed dollars to the economy and has pulled us out of the COVID recession. He criticizes the Fed for adding much-needed dollars to the economy, while keeping interest rates low, which he believes will increase economic growth and employment. Siegel likes the government putting its foot on the gas, but wants the Fed to undo what the government does by putting its foot on the brakes. Only in the “science” of economics does that make sense.
In the meantime, Siegel said he is bullish on stocks because fiscal and monetary support is going to keep flowing in.
Being “bullish on stocks” means he believes businesses will be more profitable and the economy will grow, because of the increased money supply.
Siegel noted that the total money supply in the US has gone up almost 30% since the start of the year alone.
But at the same time, he equates growth with inflation.
“That money is not going to disappear. That money is going to find its way into spending and higher prices,” Siegel said.
“The unprecedented monetary expansion, the unprecedented fiscal support, you know, I think excessive, was first going to flow into the financial markets, into the stock market, and then once we’re reopening, and we’re right at that cusp, it was going to explode into inflation,” he added.
Though Siegel claims the fiscal support is “excessive,” he doesn’t say what level of support would not be excessive. And he expects the Fed to cure the excessiveness by undoing what Congress and the President are doing. His use of the term “explode” reminds us of the claim that the growth of the federal debt is a “ticking time bomb,” a claim that has been made by thousands of “experts” for more than 80 years. That bomb has yet to explode. In Summary Siegel agrees that adding dollars to the economy grows the economy at a time when the economy suffers from recession. But he predicts that growth will come at a cost: Inflation. And though inflation currently is low, Siegel believes the Fed immediately should begin to fight inflation by undoing what the Congress and the President are doing. He wants the Fed to cut the flow of dollars to the economy and to raise interest rates. Professor Siegel is wrong on all counts. Inflation is not caused by “excessive” money supply.
While federal debt growth (red line) has been massive, inflation (blue line) has been moderate.
.
There is no relationship between changes in federal debt and changes in inflation.
Inflation is caused by shortages of key goods, most often food and/or energy. Inflation actually can be cured by increased government spending to acquire the scarce goods and to distribute them to the populace. ………………………………………………………………………… Rodger Malcolm Mitchell [ Monetary Sovereignty, Twitter: @rodgermitchell, Search: #monetarysovereignty Facebook: Rodger Malcolm Mitchell ] THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE. The most important problems in economics involve:
  • Monetary Sovereignty describes money creation and destruction.
  • Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”
Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps: Ten Steps To Prosperity:
  1. Eliminate FICA
  2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
  3. Social Security for all
  4. Free education (including post-grad) for everyone
  5. Salary for attending school
  6. Eliminate federal taxes on business
  7. Increase the standard income tax deduction, annually.
  8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
  9. Federal ownership of all banks
  10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 
  The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY

   

19 thoughts on “And still the money supply = inflation myth survives

  1. What is your take on asset price inflation? Stock prices are up – there is no scarcity there, housing prices are up. It almost seems like all the extra money wounds up in the pockets of the 1% and they are looking to invest it.

    Like

    1. Stock prices are up because of anticipation that sales and profits will be up. (The stock market merely is a prediction machine. It doesn’t reflect today. It reflects belief about tomorrow.)

      Housing construction essentially ceased during the pandemic, as did the production of what goes into a house. (I received delivery of a refrigerator I ordered last October). So, as I continually harp on, price increases are caused by shortages, though inflations (widespread price increases) more often are caused by shortages of food or oil.

      We might have a “quickie” inflation due to shortages of many things, but I believe a deep or long-term inflation is unlikely, because we have plenty of oil and food production.

      Like

  2. What do you think of the top down theory that mega corporations are behind price increases? They secretly agree to raise prices one at a time, but with large gaps of time between increases so as to make them unnoticeable to media and public. In effect, they are not competing at all, unlike smaller businesses.

    Like

    1. Do you care whether it happens by “secret agreement” or is just the normal business of keeping tabs on the competition? There is no need for a “secret agreement,” is there?

      And, by the way, small businesses do the same thing. Have you ever noticed the “coincidence” of competing local gas stations matching prices? And if you sell your house, won’t you look at “comps”?

      Like

  3. Excellent chronicle of the stupidities and inadequacies of the twin sledge hammer neo-liberal macro-economic policies of interest rate regulation and stingy fiscal stimulus. However, the problem goes deeper than just fiscally throwing money into the economy (and don’t misunderstand, we need a lot more stimulus both fiscally and individually), but it needs pin pointing of both stimulus and rational regulation.

    Here’s the more underlying problem with economic theory: The whole conception of our economic system being a free market is not only bogus but it has confused largely unregulated chaos with freedom. Why?

    Because what is to stop enterprise throughout the entire economic process from raising their prices when they see more money coming into the economy?

    Short answer: NOTHING. We require both a universally beneficial macro-economic policy mechanism that eliminates inflation at its ultimate point of expression (a 50% discount/rebate at retail sale) and a rigorous tax and regulation regime that discourages price rises by both rewarding not inflating with tax reductions and severely punishing businesses that inflate with tax increases of up to 100% of any revenue they may garner from such rises.

    Like

    1. You asked, “. . . what is to stop enterprise . . . from raising their prices when they see more money coming into the economy?”

      Answer: The same things that stop enterprises from raising their prices at any time: Competition and demand.

      Re. your last paragraph, I do not favor federal price controls either directly or indirectly.

      Like

      1. I’m surprised by your libertarian attitude toward wages and prices.

        In fact, the policies I outlined are enabling of abundant wages/purchasing power and beneficial price deflation where enterprise still gets their full price because the discount they give to consumers is rebated back to them by the monetary authority….so it creates the ideal economic reality for both business and the consumer, namely lots and lots of demand but no price or asset inflation.

        In fact, it explodes what current theorists think is impossible…. which is integrating BENEFICIAL price deflation into profit-making economic systems.

        The truth is economic theory has been backed into a corner and stymied with “the unresolvable” problems of individual scarcity of demand and yet fear of inflation because they think the quantity theory of money is burned into the stonewalls….except it’s not.

        When you realize that the monopolistic paradigm for the creation and distribution of money (Debt Only) monopolistically controlled by the private banks is the real economic problem the scales fall from one’s eyes.

        If we want to keep financially dominating profit-making economic systems from destroying themselves and tempting a reactionary socialism we’ll need to find the third alternative of direct monetary distributism by integrating the new monetary and financial paradigm of Direct and Reciprocal Monetary Gifting into the economy via that concepts very economic expression with the 50% discount/rebate policy at retail sale.

        Like

        1. Understood.

          I prefer helicopter money + Social Security for All, Medicare for All, college for all, food stamps for all — those kinds of benefits — to intrusive, detailed hands-on government manipulation and control over pricing.

          In my day, I’ve been called a liberal, a progressive, a socialist, a communist, and a conservative, but this is my first “libertarian.” It’s nice that at least I’ve not been called a fascist.

          Liked by 1 person

          1. Well now you’ve been labeled every seeming contradictory economic ism extant. Must be doing something right. 🙂

            Regarding the 50% discount/rebate policy I would mention that three of the historical signatures of paradigm change are:

            1) conceptual opposition (terra-centrism to helio-centrism and Debt Only to Direct and Reciprocal Monetary Gifting),

            2) inversion of temporal reality (again, assumed terra-centrism to helio-centrism and individual monetary scarcity and systemic austerity with inflation to abundant demand with beneficial price deflation) and

            3) dominating paradigmatic control via the church’s monopoly on the sacraments to break up of that monopoly paradigm with The Reformation and the breaking up of Finance’s monopoly paradigm of Debt Only on the creation and distribution of money/credit with the integration of the new paradigm of Gifting into the debt based system.

            Like

          2. Roger,
            I was complementing you in my first statement. As for the signatures of historical paradigm changes like the examples of the Copernican cosmological paradigm change and The Reformation that I used, I was comparing the mental and temporal changes that took place during them with the mental and temporal changes that would occur with a change in the monetary and financial paradigm from Debt Only to Monetary Gifting. They are valid observations and accurate descriptions of events.

            Like

          3. Thank you for your compliment.

            Perhaps not as monumental a change as those you mentioned, but apparently just as difficult. That said, a comparison to Dr. Ignaz Semmelweis is my personal favorite.

            Rodger

            Like

  4. Rodger, there are a couple of misconceptions in this post, although they don’t contradict your essential points.

    Modern Monetary Theory does not focus on the money supply. According to MMT, inflation begins to show up when the economy is at full employment and there are no additional real resources available for purchase. (Not all of the extra money supply will make its way to spending.) Additional spending by any sector of the economy, whether it’s government, the private sector, or foreign trade, can cause increased inflation.

    The machinations of the Fed do not add growth dollars to the economy; that’s the role of fiscal policy. What the Fed is doing is goosing asset prices such as stocks, bonds, and real estate. (It’s really all they can do with interest rate management and asset purchases (QE).) These markets have no relation to the economy as experienced by 90% of the population, except for housing prices, and rising prices for housing don’t help them either, it just raises their cost-of-living. Just look at the disparity between the vast majority struggling to get by and the top 10% whose wealth has increased exponentially during the pandemic, mostly due to the fact that they own 83% of the stock market.

    “Being “bullish on stocks” means he believes businesses will be more profitable and the economy will grow, because of the increased money supply.”

    While that may be his belief, it’s a non-sequitur. The increasing prices in the stock market do not necessarily mean that businesses will be more profitable. Although stock prices may reflect investors’ expectations of growing profits, the profits of publicly-held companies aren’t going to benefit the wider economy because they are going to be used for executive compensation, stock buybacks, and dividends; not for increasing production of goods and services.
    These are going to benefit only the top 10%, and their propensity to consume is a lot lower than the 90%.

    If local, privately owned businesses are able to grow, that will benefit the economy. However, their growth and success is dependent on the spending of the private sector, not on the stock market. If regular folks don’t have money to spend, those businesses will not grow.

    Having said all of that, there is the existential question of whether or not continuing growth is a good thing considering the state of the environment and climate change. But, that’s a different discussion.

    Like

    1. John, if inflation only began “to show up when the economy is at full employment and there are no additional real resources available for purchase,” we would have inflation only during a world war.

      Check out this graph: https://fred.stlouisfed.org/graph/fredgraph.png?g=E4u3

      The red line (inflation) parallels the yellow line (oil prices). The red line does not parallel the blue line (unemployment). Most U.S. inflations are caused by oil shortages, despite unemployment.

      Stephanie Kelton’s book states the MMT belief by claiming the limit to federal spending is inflation. I once thought that way, too. But I have seen that is a myth.

      The focus on dollars and on employment is a trap. The focus should be on key shortages, which by the way, actually can be cured by increased government spending to acquire, or to stimulate the production of, scarce products.

      The government can spend trillions upon trillions so long as that doesn’t cause shortages. It’s the shortages, not the money, that causes inflations. No shortages = no inflation, no matter how much is spent.

      Like

      1. You’re emphasizing shortages. That’s no different than what I said about there being no more real resources available for purchase. It’s just two sides of the same coin; too much money chasing too few goods. You’re talking about specific goods, I’m talking about the economy as a whole. Same result. If there are no more (essential) real resources (oil, food, etc.) available for purchase, spending more isn’t going to magically make them appear. The Earth’s resources are not infinite.

        Once all those trillions of government spending have exploited all of the available real resources, including unemployed labor, you are going to get inflation, no matter who spends the additional dollars after that point is reached. And, by the way, the US hasn’t seen full employment since WWII, and we needed wage and price controls to prevent unwanted inflation, since all available real resources were being devoted to the war effort.

        Stephanie Kelton is using short-hand for the limit on spending, since she’s writing for the non-economist public. Dig a bit deeper into the academics of MMT, especially Bill Mitchell, for a more nuanced explication of spending limits and inflation.

        The problem with your last sentence is that too much spending, in fact, can create those shortages, thereby creating inflation. QED

        Like

        1. John, I agree with you that spending can create shortages. Not even a question.

          The point is this: It’s not the spending that creates inflation; it’s the shortages that create inflation. The old saw about “too much money chasing too few goods causes inflation” is a myth. It should say, “too few goods causes inflation.” Period.

          Only when deficits create shortages do we have inflation. The focus on federal deficit spending is flat-out wrong because it leads to bad conclusions.

          If you see trillions in spending don’t worry. But if you see an oil shortage, worry.

          Like

  5. Excellent article, Rodger! A short term “quickie” inflation due to temporary shortages is indeed very different from a chronic inflation or stagflation.

    The former can be solved by the federal government (ironically) printing money to directly purchase (and thus incentivize) the goods/services that are facing the shortage, thus ending the shortage and ending the inflation with it.

    The latter can be solved by raising interest rates high enough that the interest rate exceeds the inflation rate (i.e. real cost of money > 0) long enough for the inflation rate to plummet, and subsequently dropping the interest rate to match the rapidly falling inflation rate.

    And if it is a stagflation, keep printing money to solve the stagnation and recession component.

    Problem solved.

    Like

    1. Thank you. Sadly, even my MMT pals think federal spending can cause inflation.

      That never is the case. Inflation always is caused by scarcity, most often a scarcity of food and/or oil.

      The big drivers of today’s inflation are shortages of oil, food, and computer chips, and to a minor degree, labor. Government spending actually will help relieve those scarcities, and thus reduce inflation.

      Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s