December 8, 2021

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Inflation Facts: Startup Difficulties Only?  Or an overdose of wonder drug?

Inflation Facts: Startup Difficulties Only? Or an overdose of wonder drug?

We hear a lot about bottlenecks and supply problems right now. DN writes about it Data chip missing. Container ships have to wait ten to twelve days to reach the largest ports in the United States. Energy and more are becoming more and more expensive.

Is this the beginning of permanent higher inflation, driven by eighteen months of highly expansionary monetary policy?

Øyvind Thomassen

Øyvind Thomassen

In the worst case, the US Federal Reserve may have to raise interest rates significantly, with a stock market crash as an inevitable result. Did Governor Jerome Powell prescribe so much of the miracle cure “quantitative easing” that it ends up in an overdose?

This seems to apply on the supply side: there are startup problems after a reopening – the same way you might get stuck a bit if you suddenly had to start the external drive.

But the other explanation is that the pressure of central bank money has raised demand to a higher level than it was before Corona. Thus, the capacitance is not enough, even if the supply side goes back to where it was, let it be.

Computer chip production at TSMC, the market leader in Taiwan, rose by a third in the last quarter from the previous two years. The largest port in the United States, Los Angeles, emptied 16 percent of containers in September of this year compared to two years earlier.

Loose facts, yes, but if they testify that supply problems are due to higher demand than they were before Corona, there is a greater chance that inflation will not disappear immediately, and that interest rates will eventually rise significantly.

Therefore, the first narrative, about startup problems, fits better with central banks’ understanding of reality. It is right to keep pushing money a little more, and there is no reason to fear that inflation will be permanent, or that the punctured ball should be removed from the pool of stocks immediately.

The population of the municipality of Oslo is seven hundred thousand people. The actual increase in population last year was 3,500. But imagine that net immigration was instead fifty thousand people with the same purchasing power as today’s population. Everyone will need a place to live, so the demand for existing homes, and hence the price level, will rise exponentially.

This is fully consistent with the arrangement of the direct contribution of the Federal Reserve to the demand for US securities since March 2020.

The total market capitalization of US listed companies, US government debt and US non-financial corporate debt is about $82 billion.

Since March 2020, the Federal Reserve has printed $4,240 billion new, more than three Norwegian oil funds in current value, or just over five percent of the value of all US financial assets now. As a share of the market value of these assets in mid-2020, we’re talking about seven to eight percent at least.

Then the central bank used the money to buy securities. Printing money also has a multiplier effect, since banks with good access to financing provide more credit, which is used, among other things, to buy shares.

The point here is that it was the central bank that pushed stock prices to record levels. If rising inflation forces the Federal Reserve to restrict access to credit in the economy, we can expect a sharp decline in stock markets.

At least since Black Monday in 1987, the Federal Reserve has had great success cutting interest rates once stock prices have fallen.

But when, after the 2008 financial crisis, central banks began subsidy-rich purchases of securities, many did not allow themselves to be fooled by the fictitious name. QE was just old-fashioned money printing. As Nobel laureate Milton Friedman has shown, this leads in only one place – to inflation.

The next step is that the central bank must put an end to all this by setting interest rates high enough to cause a recession, as happened in 1979-81.

But inflation did not appear. And so QE became the goose that just kept laying the golden eggs. No matter how wrong that is, whether it’s a financial crisis or a corona, it’s just a matter of pumping enough money into the system.

Admittedly, the rich are getting richer than before, but people can’t complain, because the alternative is stagnation and unemployment.

The big question now is whether Jerome Powell has gone too far. The experiences from the financial crisis clearly made it tempting to give gas this time. But was it arrogance to think that new money could solve all problems? Should he have settled for a few hundred billion instead of 4240 billion?

It is not good to say.

The answer will likely start to emerge in the inflation numbers in the next six months. In the meantime, the Federal Reserve will decide soon whether to stop buying securities each month for $120 billion newly printed, about nine percent of the petroleum fund.(Terms)Copyright Dagens Næringsliv AS and/or our suppliers. We want you to share our cases using a link that leads directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.

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