July 16, 2022

America's Giant Hangover

America is behaving like the drunk who went our drinking. After imbibing a few too many, he wrecked the car, ripped the front door off its hinges, and hit his head. The following day, he woke with a splitting headache, the broken door, and a wrecked car. And then promptly denied that he did it. "Everything's back to normal," he cried—nothing to see here. Just move along.

In case you missed it, and it looks like all the monetary and regulatory authorities in this country have missed it, the government has just been through the most significant financial boondoggle in history. In the name of the Pandemic, the Federal Reserve, along with the US Treasury, just increased our money supply by not double, not triple but by five times (quintuple?). Something that was never before seen outside of the most profligate banana republics.

I present for your review Exhibit "A."

 

 

M1 is the most basic measure of money. You'll note that from 1960 until 2020, M1 was below $4 Trillion. The slow, gradual growth of the money supply over 60 years. And then, the Fed and Treasury stepped in to "stimulate" the economy.

Their idea of "stimulus" resulted in them pumping M1 five times and adding over $16 Trillion to the financial system, bringing M1 to over $20 trillion today.

And now, the Fed, the Treasury, and all of Washington sit back and denies that it ever happened. Like the drunk in our story, ignoring the broken door and wrecked car. In our case, ignore those 16 trillion extra dollars now floating around looking for a home.

Today the Fed asks us to believe that we can instantly return to "normal." They've initiated a series of strategies designed to manage TODAY'S money supply. They raise interest rates to manage TODAY'S demand-driven inflation. Shortly they will require banks to tighten lending requirements to control TODAY'S loan demand.

There is never a mention of what went before. Instead, our leaders quibble endlessly about whether they should raise rates half a percent or three-quarters.

What does it matter? That horse has already left the barn. The die is cast. Nothing that the Federal Reserve will do today will alter the wave of inflation that washes over us. $16 trillion of excess stimulus dollars will produce inflation records like we've not seen recently. The wonder, frankly, is that current inflation is not much higher.

The stated objective of the stimulus was to aid the economy to return to normal after those draconian lock-downs that were part of the government's response to Covid-19. The Fed had accurately, I think, predicted that lock-down would cripple the economy. And it did.

Then they began their $16 Trillion money printing. All are designed to stimulate the demand side of the economy. Classic Keynesian, although incredibly overdone. At that point, the Fed should have realized that multiplying the money supply by a factor of 500% would be inflationary. But apparently, they missed that part.

 

OK, so the Fed had to make a demanding series of decisions. The upshot is that they would boost Demand, but at the cost of higher inflation. Today we're living with that high inflation cost.

And at just the time that Demand is, at last, beginning to take hold, the Fed now reverses itself. More concerned with public opinion and a falling Stock Market, the Fed now decided to crush Demand. Rising interest rates and higher loan requirements will push this fragile economy into recession. If not worse.

And it's all because no one in Washington, or for that matter, Wall Street, will stand up and say: look what we did. Last year we flooded the nation with dollars. We went on a binge as the country had never seen. At the time, the Fed thought it was the best strategy.

OK, I get it.

Then let's have a consistent monetary objective. If the goal was to preserve Demand, let us stand by that goal. Instead, the Fed dithers. We are veering from stimulus to restriction, from all-out money pumping, to now tight money.

If you're going to be a Monetary Drunk, you'd better learn to live with the hangover.