The threat of inflation is huge, even as money supply grows, says Savant

Inflation nervousness is upon us. After a worrying jump in the Consumer Price Index (CPI) (up 5.4% in the last 12 months to July), many people are worried about a return to low inflation. two digits, which was defeated four decades ago.

Don’t worry, says David Waddell, CEO and chief investment strategist at Waddell & Associates. The vast increase in the dollar, known as the money supply, or M2, will not translate into a nasty all-round price escalation. And, in fact, Waddell adds, it will help fuel economic growth.

All of this comes as the Federal Reserve holds its annual rally this week in Jackson Hole, Wyoming, where interest rate hikes, declining bond purchases and, yes, inflation, will be huge. topics. Fed Chairman Jerome Powell believes rising inflation is a temporary bottleneck phenomenon of economic reopening.

The main source of M2 growth in 2020 was the Fed’s purchases of Treasury bonds and mortgage-backed securities (MBS). These purchases give sellers a payment, credited to their bank deposit account. This extends M2. Since March 2020, the Fed’s holdings of Treasury papers and MBS have increased by around $ 3 trillion. M2 has increased by roughly the same amount.

Waddell argued in his recent blog post that those who “cry inflation!” Miss a crucial fact. While consumer bank accounts have certainly swelled, not all the new minted money necessarily turns into indiscriminate consumer spending. “Much of that liquidity is handed over to the banks and then returned to the Fed, unless there is an equal loan demand,” he wrote. Before the pandemic, he noted, banks held $ 1.7 trillion in deposits with the Fed. And now they have $ 3.8 trillion. “Within the banks themselves,” he continued, “customers hid $ 13.4 trillion before the pandemic, compared to $ 17 trillion today.”

At the same time, the $ 11 trillion in new dollars is playing a constructive role in the economy, he said, far from fueling a nauseating circle of price escalation in the disco era in anticipation of the next explosion of endless inflation. More dollars available these days means more growth in gross domestic product (GDP), income, earnings and household net worth.

“Much of this money has been used, leading to historic gains in prosperity, but much also remains unused in the form of customer deposits with banks and bank deposits with the central bank,” he said. -he writes. “In short, the US economy has more money supply than demand for money (which lowers inflation) and more economic demand than economic supply (which drives up inflation).”

According to Factset researchers, Waddell observed that S&P 500 companies increased their revenues by 24.7% in the last quarter. Analysts estimate revenue growth of 14% for the third quarter and 11% for the fourth. In the second quarter that just ended, 87% of S&P members beat revenue forecast by an average margin of 4.9%, with both results setting records, he said.

For the full year, Waddell said, “Analysts are forecasting overall revenue growth of 14.3%.” As a result, businesses are seeing sales rates four times higher than normal.

None of this, he concluded, sounds too bad. Of course, quite the opposite.

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Tags: David Waddell, Federal Reserve, GDP, inflation, M2, money supply, net worth, S&P 500, US households, Waddell & Associates

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