Amazon founder Jeff Bezos and Tesla and SpaceX CEO Elon Musk blame the government and the Fed for inflation. In Musk’s words, “The obvious reason for inflation is that the government printed a zillion more dollars than it has. This is not super complicated.”
They and other luminaries subscribe to the inflation sophism: “too much money chasing too few goods.”
Yes, we’ve had “too few goods,” due to a pandemic perfect storm — depressed U.S. oil production and manufacturing output, severe supply chain disruptions and war-like labor shortages — but that won’t endure. It was exacerbated by Russia’s invasion of Ukraine, which has radically reduced global purchases of Russian oil, grain and fertilizer and drastically diminished Ukrainian grain exports.
Meanwhile, our economy rebounded much faster than expected (due largely to the dollars pumped-in by the government and Fed), reviving demand that couldn’t be readily met.
It’s true that when our economy was blindsided by COVID, the government borrowed trillions to send stimulus money to most Americans, and — as it had after the financial crash — the Fed electronically “printed money” to buy nearly $5 trillion of government debt and mortgage securities.
But according to a Washington Post analysis, most of those dollars can’t possibly have stoked inflation — because the financial institutions the Fed paid parked over $2 trillion in their accounts at the Fed, and American households saved a big chunk of their stimulus, banking about $3 trillion. The Post quotes a former Treasury Department official: “The money supply went up, but… they’re not spending it.” In fact, money is moving through our economy more slowly than at almost any time in 65 years.
Clearly, what impelled inflation was the unprecedented confluence of supply and demand incongruities as a result of the pandemic and war in Ukraine, not “too much money.”
So it’s understandable Fed Chairman Jerome Powell recently said, “Now, we think more of just the imbalances between supply and demand in the real economy rather than monetary aggregates” (our total money stock, referred to as M2, is the paramount monetary aggregate). A refrigerator and pantry stuffed with food won’t make you fat unless you overeat; likewise, even an economy awash with dollars doesn’t inevitably induce lending and spending.
President Biden — despite stellar growth and employment stats — is unfairly maligned for stoking inflation.
Historic money metrics further undermine the Bezos/Musk fallacy. Since 2020, M2 has expanded about 50 percent; total inflation, as measured by the Consumer Price Index (CPI), has been less than 15 percent. From 2010-2020, with the Fed still ladling lucre onto our economy to resuscitate it from the Great Recession, M2 almost doubled — but CPI increased only 19 percent. Annual inflation lingered below the Fed’s 2-percent target.
There’s been a similar non-proportionality between M2 and CPI and between annual M2 growth and CPI increases for 52 years. M2 is over 22-times larger than in 1970, but the CPI is only seven-times higher — a 3:1 ratio of M2 growth to inflation.
This disconnect — and the fact that additional money in the economy isn’t automatically lent and spent — is related to another rarely-mentioned reality: Added dollars fuel not only consumption but investment — which stimulates increased productive capacity, business formation and expansion, R&D that spurs innovation and which can draw more people into the workforce. These counteract inflation by adding to output, lowering prices and curbing compensation hikes.
Amazon and Tesla epitomize how this works. Bezos and Musk built their behemoths when Fed policy was accommodative; investors slung cash at startups. Now Amazon restrains inflation more than any company in history. Tesla collapsed electric vehicle costs, making EVs…
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