Are all those extra dollars burning a hole in your pocket? Can't wait to go out and spend all that extra cash?
I know it sounds crazy, but that's where the Federal Reserve Bank thinks you're at. You see, the Fed has announced that it's going to fight the inflation, that we're locked-in, by adopting the strategies that are used to fight, what's called generally Demand-Pull Inflation.
Demand-Pull Inflation, as the name implies is when aggregate demand in the economy, exceeds aggregate supply. It's when you and I, the American Consumer, find ourselves flush with cash, and want to go out and spend it. So much so that our demand outstrips the amount of merchandise and services available in our economy.
It's a happy confluence of very prosperous workers, having generous wages and wanting to spend, spend, spend.
Now anyone who thinks that this is where our country is at today, it truly delusional. We are most definitely NOT a group of free-spending consumers. And we're definitely not swimming in cash.
In fact, just the opposite. Cash is getting tight around here, as we are forced to meet the constantly rising cost of living.
And this point is absolutely critical. Because the strategy the Fed is adopting is to fight the excess cash in the system. Those fictional dollars that you are I don't really have. By cutting back on liquidity injections and raising interest rates, the Fed is going to make cash harder to come by. At just the time that we're going to need a little boost.
And it's all because the Fed is fighting the wrong dragon: Demand-Pull Inflation. We most definitely do not have inflation driven by too much demand.
We have a relatively new form of inflation. Although it could be argued that it's akin to the Oil Embargo of the 1970s.
What we have today is a supply issue. And issue driven by outside our borders. Outside our own economy. We all know what has caused this current inflation. It's the Supply Chain combined with the lingering effects of last year's economic lockdown.
Store shelves are emptying out. The price of food and energy is literally skyrocketing. And it's not because we all decided to eat more or fill up the gas tank more often. In fact, it's likely just the opposite. Many of us are trying to cut back. Live within our means. We are not pushing up our demand, thereby increasing inflation. And yet the future path of the Fed, in tightening money, will likely fall on our shoulders.
The Supply Chain and Economic LockDown are creating a scarcity problem. And that scarcity is leading to higher prices, and thereby this inflation. And scarcity is literally everywhere we look.
From the Chinese goods, stuck at sea, because out Ports still have not caught up from the Covid LockDown. To the farmers who had to waste milk, eggs, livestock, and perishables because stores and shipping were in quarantine. To the anti-energy policy of the Biden Administration. It has been an orchestration of scarcity. Cutting back vitally needed goods. And, again, it is this lack of supply that has to lead to these higher prices.
In an interesting quirk of fate, it won't be long before we see if this current action of the Fed is the monumental mistake that I think it is.
Last night China announced that their central bank, instead of tightening, was going to lower interest rates. And the gasp heard in Washington and across Europe was palpable.
This is exactly the opposite strategy that the US and Europe are taking. Now granted China's current inflation rate is a mere fraction of that of the US.
But if our hypothesis is correct, and the problem is scarcity. Then perhaps the greater advantage for China is the fact that their economy is export-driven. And much less reliant on imports for their day-to-day standard of living.
An additional note: and what goods that the Chinese do need to import, such as food and coal, they have been stockpiling for at least the last 2 or 3 years. Perhaps the Chinese have seen the supply issue and directly addressed it.
So, to me, these rising prices that we're seeing now are a direct result of scarcity. A lack of supply. And there is no monetary policy that exists that will address a lack of supply.