Spiraling inflation, money supply and expectations

November 3, 2021 5:49 p.m. ET

The Federal Reserve building in Washington.


Stefani Reynolds / Bloomberg News

John Greenwood and Steve Hanke’s claim that excessive monetary growth is the root of recent high inflation does not hold water (“The Monetary Bathtub Is Overflowing,” op-ed, October 22). Behind the 35.7% increase in M2 money supply that they cite – and attribute mainly to the Federal Reserve – is hiding $ 5.5 trillion in net purchasing power injected by the federal government. This was to offset the biggest short-term blow to aggregate demand in US history. The Fed’s quantitative easing changes the form of the “money” (purchasing power) that deficits create, not the amount.

If money growth were the cause of inflation, real personal consumption numbers would skyrocket, but they have barely returned to the pre-Covid trend. The Consumer Price Index report reveals that large changes in relative prices, especially for energy, food and vehicles, and base effects are behind the increase in inflation. These self-correct in a few months and not in a few years. Inflation concerns can rest easy: If high inflation threatens to become persistent because public inflation expectations soar, the Fed will respond with monetary tightening. Thanks to years of monetary easing, he has tons of ammunition at his fingertips.

Paul sheard

Harvard Kennedy School

New York

The authors present a clear picture of the causes of inflation. The excessive growth of the money supply leads them to conclude: “Persistent, non-transient inflation will be with us for the next two to three years.

The problem with their conclusion is the implicit assumption that the Fed will engage in non-inflationary monetary policy after finding out that we are in a persistent inflationary situation. Recall that the last similar serious inflation started in the late 1960s, it took over a decade to die out. Tighter currency restriction will raise the unemployment rate and burst asset bubbles, which in turn will put pressure on the Fed to take it slow. Expect the Fed to stay behind and persistent inflation to persist through the decade.

Em. Prof. Burton Abrams

University of Delaware

Bovey, Minnesota.

On Mickey Levy’s “Fed Compplacency Feeds Inflation” (editorial, November 1): Negative real interest rates, record transfer payments and expansive fiscal policy have laid the groundwork for a surge in inflation. Combine these with supply chain issues, disincentives to work, and rising commodity and transportation costs, and you have a recipe for skyrocketing inflation. The Fed would like to believe the problem will be short-lived, but history shows that once the consensus is that inflation persists, sellers and buyers race to outperform further increases and the price spiral continues. .

The tipping point has passed and the fact that the central bank clings to the idea that inflation is only a transitory problem will make the problem worse. Does anyone remember the WIN (Whip Inflation Now) buttons from 1974?

Robert M. Sussman

Paradise Valley, Arizona.

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Published in the print edition of November 4, 2021 under the title “Inflation, Money and Spiraling Expectations”.

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