In the present analysis, we will show the way in which governments cause inflation and pretend to fight for accuracy. The new announcement of a 2.8% increase in the core personal spending index in the US, the Fed’s preferred measure, gives us the trigger to proceed with the downward analysis.
This is the key indicator should be less volatile than the consumer price index and a better indicator of the actual deflation process. But this number is not only alarming, given the repeated rhetoric that the fight against inflation is coming to an end, but it becomes even more so when we look at the upward trend over the past three and six months.
Inflation has accelerated on a quarterly and semi-annual basis. Until now, there was never any indication that we were headed for the 2% inflation target, let alone the 1.8% average before the pandemic. Today we are at 3%+ with no indication of a significant drop anytime soon. This finding is based on current Treasury and FED borrowing levels that allow for an increase in the money supply.
Why is inflation not falling?
There is no more important component of inflation than cost.
Fiscal policy has been reckless and massive deficit spending is fueling inflationary pressures through unnecessary government consumption of newly created currency. Government spending prints new units of currency, and inflation is caused by issuing more than the private sector requires, reducing the purchasing power of money.
There is no cost push inflation, greed inflation or commodity inflation. None of these factors can cause overall prices to rise, consolidate and continue to rise on an annual basis.
Furthermore, if cost push or supply chain disruptions were the cause of inflation, we would have deflation today, not an increase in overall prices each month. Governments created the inflation explosion of 2021 and not only ignored fiscal responsibility but, in the case of the United States, ran a completely unsustainable and uncalled for budget deficit.
Governments destroy the purchasing power of money and perpetuate inflation. A rise in money growth preceded the spike in inflation, and countries with stronger money growth saw significantly higher inflation.
The policy response to the COVID-19 pandemic would massively increase fiscal deficits in the world’s leading countries. The deficits are largely monetary in nature, with heavy government borrowing by both national central banks and commercial banks.
The monetization of budget deficits, combined with official support for emergency bank lending to cash-strapped companies, leads to extremely high rates of growth in the money supply, and these fuel an inflationary boom.
Inflation is politics
Inflation is not accidental or fatal. It’s politics. Governments tend to announce large-scale spending programs to fight inflation. But these policies speed up the speed of money in a recovery, particularly after a lockdown like the one in 2020, as well as the amount of money in the system.
Thus, inflation is rising rapidly. The only way to contain the explosion of inflation is to reduce spending and reduce the quantity and growth of money.
However, although central banks have announced so-called restrictive policies, reality has shown otherwise. As government spending and the deficit have not been reduced at all, but rather the opposite, economies have been flooded with the after-waves of the first impact on money growth (2020).
The amount of money in the system has not decreased. The money supply measured as M2 has decreased and the Federal Reserve’s balance sheet has decreased, but these forces have been fully offset by net liquidity and money market funds.
The amount of money has not decreased
The US Federal Reserve has raised interest rates, but this only helps contain money growth, not eliminate inflationary pressures. Moreover, as markets immediately discounted large rate cuts in 2024, the real effect on money growth was simply to postpone the inevitable future monetization of such massive deficits.
The Federal Reserve has multiplied its support for the troubled banking sector through the discount window, which offsets the modest reduction in the Fed’s balance sheet. Instead of attacking inflation, the so-called “Inflation Reduction Act” has perpetuated the destruction of the value of the currency issued.
By buying the government bonds on banks’ balance sheets at par despite the price collapse, the Fed was inadvertently printing new money, sabotaging its own restrictive measures. The flawed Keynesian policies implemented by the US government nullified the Federal Reserve’s efforts to reduce the balance sheet and raise interest rates.
