Power & Market

With the Federal Reserve bound for a fairly large rate increase this Wednesday, plus talk by the White House on whether the definition of a recession should be changed (likely, for no other reason than to avoid a recession) it’s easy to forget about the money supply. Conversations about the root cause of price increases hardly makes headlines. Even before the Austrian school, many expressed concerns with increasing the money supply. Dr. Mark Thornton dedicated a substantial amount of his career towards writing about the effects of monetary expansion, commonly referred to as the Cantillon Effect.

Looking at the M2 money supply from countries around the world reveals the problem Cantillon wrote about in the 18th century.

Here’s Venezuela’s M2, a country which had an inflation rate of almost 3,000% in the year 2020.

See below for Turkey’s (Turkiye) M2. It also suffers from the same upward trajectory, almost like a ski slope. ABC News reports annual inflation is at 78.6%, 24-year high. Even Ukraine is feeling the effects of price and monetary inflation. Not only do billions of dollars in foreign aid continue to flood into the country, but their M2 currency has also increased drastically over time. Its annual interest rate is 25% and the expected inflation is at 30%, according to Reuters.  If one were to look at the majority of M2 charts from around the world, the same exponential increase in money supply becomes apparent, making the cause of this global price inflation fairly easy to diagnose. Back in the USA, the M2 chart doesn’t look terribly different; the same upward trajectory, turning exponential is seen: Stock traders say that parabolic moves don’t end well. The trajectory of money supply growth is highly suspect because so few outcomes are possible, none painless.

Either the money supply will continue increasing at an accelerated rate, and more price distortion, higher prices and economic destruction will ensue, or somehow, the Federal Reserve will have to do something no other central bank in the world can do, i.e., show restraint.

Still, Cantillon’s ideas from almost three centuries ago continue largely unnoticed by central planners. The problem can be quickly thought through: A central bank can create new money and give it to a select few, which is a great advantage to those who receive the new money first. Or, money can be more equally distributed to the masses. But as we can all understand now, most prices will rise and dollar purchasing power will become severely weakened. Therefore, whether newly created money were to go to a few, or to everyone, the outcome for society will always be harmful.

Unfortunately, only a few places exist where people can have these conversations. Luckily, Mises University is one of those places.

The Us Bureau of Labor Statistics released new producer price index (PPI) data today, and it’s not good news for consumers.

The PPI is a measure of prices at the production phase of goods and services, and is often an indicator of where consumer prices are headed. Prior to 1978, the index was known as the wholesale price index.

For April this year, year-over-year growth in the PPI came in at over 10 percent for the fifth month in a row, reaching 11 percent. This was a small drop from March’s year-over-year rate of 11.5 percent, but continues to suggest ongoing upward pressure in prices. Ther month-over-month change for April was 0.5 percent, which was a sizable pullback from March’s 1.6 percent month-over-month change, but movement remains upward and from a very elevated base.

Year-over-year changes in the PPI have been over 7 percent for 11 months.

As with the CPI index, the narrative among optimistic analysists was that PPI measures would moderate significantly in April and signal a downward turn. That does not appear to be the case so far. As the AP reports today:

The report included some signs that price increases are moderating, but at a painfully high level … prices are still rising at a historically rapid clip. Food costs rose 1.5% just in April from March, while shipping and warehousing prices leapt 3.6%. New car prices rose 0.8%.

In other words, there are still no indications that inflationary pressures are about to disappear. Moreover, from a policy standpoint, neither the Biden administration nor the central bank have signaled they will be taking any steps that could reliably reverse this trend.

The Biden administration has repeatedly taken a stance in favor of greater regulation which only curtails production, further constraining supply and pushing up prices.

Meanwhile, the Federal Reserve—which has been the primary source of inflation due to its ongoing financial repression policies—continues to embrace nothing more than the most tepid steps toward reining in monetary inflation.

As I wrote here last week, after nearly than a year of very elevated inflation rates, the Fed has said it will not begin reducing its portfolio—thus reducing the money supply—until June. And even then, the scale of the reductions will be miniscule. Moreover, the Fed’s planned increases to interest rates will only raise the target federal funds rate to around two percent, assuming all goes as planned.

These are tiny interventions which will do little to reduce inflation unless they trigger a recession—and then we’ll have both inflation and high unemployment.

Following the first interest rate increase in several years, Federal Reserve Chair Jerome Powell provided some interesting predictions for the year ahead. Starting with his thoughts on the likelihood of a recession:

…I would start by saying that, in my view, the probability of a recession within the next year is not particularly elevated.

He believes that because aggregate demand, the labor market, job growth, and household/business balance sheets are all strong, the economy “will be able to flourish” with less accommodative monetary policy.

When asked about (price) inflation for the rest of the year, he mentioned how the Ukraine crisis should add to it, but thinks inflation will go down later this year, confidently saying he expects inflation to be “lower than last year.”

He was then asked how much he expects inflation to come down as a direct result of the Fed’s actions, in which he responded how other factors besides monetary policy, like supply chain issues, affect inflation. He gave the following dates:

You know, I think monetary policy starts to bite on inflation and on growth, with a lag, of course. And so you would see that more in '23 and '24.

His thoughts on inflation and interest rates were made clear through the following question, regarding how the average American should understand inflation:

How is the 25 basis point hike today and then the signaling on future Fed policy going to address the inflation that they're feeling at the stores on a daily basis?

Powell first mentioned how middle-income persons can handle more inflation, in his own words:

…I mean, we've all seen charts that show, if you're a middle-income person, you've got room to absorb some inflation.

Then provided a formal response:

You asked about rates. So the way that works I would explain is, as we raise interest rates, that should gradually slow down demand for the interest sensitive parts of the economy. And so what we would see is demand slowing down but just enough so that it's a better match with supply. And that brings -- that will bring inflation down over time.

While not said explicitly, his plan indicates that by raising rates on home mortgages and quite literally every rate sensitive loan product, including the expense on US Government debt, should bring down the prices of everyday household items.

As noted in the previous article about raising rates to fight inflation, it seems strange there would ever exist an inflation problem in the world, or at least a problem in America, if raising rates to lower prices worked as easily as it has been portrayed by the central bank.

The path of monetary tightening continues with more details on balance sheet reduction to come in May, followed by continual rate hikes. With the raising of rates coupled with high inflation readings, the comparison between now and the 1980’s continues. It was reminded to Powell that the last time CPI inflation was this high occurred in:

…July of 1981, when the effective federal funds rate was 19.2 percent.

One could take it to mean there is room for rates to rise today; however, 1981 also marks the first year America’s national debt surpassed $1 trillion. Today the national debt is over $30 trillion. Few things should ever be considered impossible, but an interest rate at 19.2 percent in today’s world at these debt levels seems impossible. Yet at the same time, it sounds just as impossible to say interest rates can never increase to 5, 10 or even 19.2 percent ever again.

History was made under the Biden administration last week as the Federal Reserve announced Dr. Susan M. Collins to be named President and CEO of the Federal Reserve Bank of Boston. Her appointment makes her the first African-American female to serve on the Fed’s Board of Directors.

Congratulations to Dr. Collins. Unfortunately, given the state of the country at this time, government appointments can be bitter-sweet. As mentioned by Fortune, race seems to play a vital role in almost all facets of decision making:

Progressive Democrats have been pressing for greater diversity in leadership positions at the Fed, which has been dominated by White males.

Not only must race be factored into hiring decisions, but there must be a public display of it, with that well-known, ostentatious, self-congratulatory wokism that progressives have mastered. The Boston Fed’s press release exemplifies this when, on the announcement of her appointment, they proudly declared:

The search committee worked very hard to ensure a rigorous, open, and inclusive process…

But does this help, or hurt the country and race relations?

Because of announcements like these, some might look at this from a superficial standpoint and say she got the job because of race which could lead to further racial divide and become a possible point of contention amongst her peers.

However, let’s look at her pedigree:

Collins spent many years in the Boston area while earning her undergraduate degree at Harvard University (summa cum laude), earning her Ph.D. at the Massachusetts Institute of Technology…

She served as an assistant, then associate professor at Harvard, and that’s only the beginning of her career:

She also worked in Washington in roles including senior staff economist at the President's Council of Economic Advisers, professor at Georgetown University, senior fellow in economic studies at the Brookings Institution, and visiting scholar at the International Monetary Fund.

This is just some of it, as she authored many research papers and:

…has a deep understanding of the Federal Reserve System's inner workings, having served for nine years as a director at the Chicago Reserve Bank.

Perhaps we mustn’t get fooled by progressives and their proclivity to prove they aren’t racist. Her credentials speak for themselves. Her education and various accomplishments are exactly what the Federal Reserve System wants from its leadership, someone well versed in Neoclassical economics, while experience with the IMF and the Fed is nothing but an added bonus.

If, for no reason other than tact, no one announced the overabundance of “white males” at the Fed and the rigorous search for inclusivity, then they could simply hire based on credentials. Her ability to tow the line likely would have ensured Dr. Collins got the job anyway. Race need not play a factor in the hiring decision and there would not have to be a dark cloud of racial overhang around the entire affair.

Congratulations again to Dr. Collins. I’ll be waiting in the wings for her first press release, hoping she says something about the free market, liberty and freedom because that’s what matters most. Feel free to see my profile at Mises Institute. I assure you, I’d rather be judged not by the color of my skin, but by the content of my character… my articles, and fashion sense. I’m quite confident Dr. Collins would agree.