by Gary Alexander

December 21, 2021

“Inflation is always and everywhere a monetary phenomenon, in the sense that it can be produced only by a more rapid increase in the quantity of money ….”

–Milton Friedman, “The Counter-Revolution in Monetary Theory” (1970)

“Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation …. These problems have been larger and longer lasting than anticipated, exacerbated by waves of the virus. As a result, overall inflation is running well above our 2% long-run goal and will likely continue to do so well into next year.”

–Fed Chair Jerome Powell, December 15, 2021

Fed Chairman Jerome Powell finally retired the adjective “transitory” for inflation on November 30, but just before the Fed Chair threw in the towel on the “T” word, major political voices were still using it:

All of the economists that the President has been relying on suggest there iture to the inflation problem.” –Jennifer Granholm, U.S. Secretary of Energy, November 27, 2021

“This inflation that we’re experiencing is transitory. It is not going to be here for long.”

­–Representative Maxine Waters (D-Cal), November 28, 2021

Also, after months of denying that inflation exists, the Biden Administration now says inflation is good for the economy and his economists aver that inflation is “healthy” – and it doesn’t even hurt the poor!

In other words, “We didn’t create this new round of inflation – but if we did, it’s really a good thing.”

Now that inflation is with us, the establishment view is that inflation is good. The Fed always had a positive (+2%) “target” for inflation, as if losing two cents on a dollar each year (losing money at 1% interest) were a good thing. CNBC’s voice of the Establishment, Andrew Ross Sorkin, wrote in the New York Times last July that we should be grateful to have inflation – it is a “salve” on our economic wounds:

“Inflation has long been seen as the economic villain. That view is changing. For those who worry about growing inequality, inflation might be a salve, up to a point. A 2014 study of developed economies found that as inflation rose, income inequality tended to shrink. Inflation could be as high as 13 percent, the research found, and still act as an equalizer, shifting the benefits of economic growth toward lower-income individuals.”

–Andrew Ross Sorkin, New York Times, July 14, 2021

By his logic, if the rich lose money faster than the poor, that’s good because it promotes greater equality.

Nobel Prize winner Paul Krugman said the same thing – that inflation doesn’t really hurt the poor. As usual, he speaks in theory, not reality. In theory, debts are paid back in depreciating dollars. Big deal.

Instead, let’s look at a day in a lower-class worker’s life. For breakfast, cereals are up an average 45% (oats are up 95%, corn 22%, wheat 21%). The sugar on top is up 23%. Coffee is up 84%. That’s a bad start. The price of a used car is up by more than 30% in the last year. To fill that clunker’s gas tank, the gasoline at the pump is up over 50%. Here are sample food and energy price increases (year-to-date):

Alas, food and energy are subtracted from the “core” Consumer Price Index, so the poor are out of luck.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Not only are food and energy subtracted to report “core” inflation, but the CPI only weights gasoline 4% in the CPI. That may be fine for an urban resident working from home, but for those with tough daily jobs commuting long hauls, a 4% fuel weighting is a joke. Same for food. Food and energy are half their costs.

The Consumer Price Index hit a 39-year high last month, but that’s not half the problem. In the real world, many necessities are rising faster. The CPI doesn’t fully measure skyrocketing housing costs. Rents in some parts of Southern California have tripled in a year. In Redlands, an $800 apartment now goes for $2,600. The median sales price of a single-family home in Austin, Texas is up 33.5% in the last year.

How the Inflation Genie Was Released from Ms. Yellen’s Lamp

“The ‘Build Back Better Act’ is a fully offset decade-long investment that will not add to near-term inflationary pressures.” –Treasury Secretary Janet Yellen in a memo to Senators, December 8, 2021

It’s hard to believe now, but before COVID struck America, in February of 2020, Fed Chair Jerome Powell said: “It’s not going to be easy to have inflation move up.” He told Congress, “Even with the very high level of accommodation that we’re providing… It will take time.” Back then, the Fed’s greater concern was that inflation would stay too low, below the Fed’s 2% target. Deflation was their bigger fear.

Then came COVID, after which the Fed released trillions of dollars into the economy, while the U.S. Treasury released other trillions in spending plans and “stimulus” funds – all in unprecedented amounts.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The first wave of monetary stimulus in the second quarter of 2020 was necessary, in my view, since we forcibly froze the economy, putting millions out of work. In the spirit of the Constitution and justice, we owed these workers and business owners some compensation for their forced losses beyond their control.

However, nearly all of the massive monetary creation and stimulus packages since mid-2020 have been politically motivated, untargeted, and excessive, in my view, causing a huge and powerful new round of inflation in every-day prices as well as most asset classes – stocks, real estate, energy, bitcoin – you name it. Checks were sent to over 80% of Americans rather than the truly needy; generous unemployment was added for 18+ months, even though jobs were going begging; renters were given a free pass on rent, even if they could afford it; and even the IRS postponed deadlines and required distributions – for everyone?!

Bitcoin has sagged lately, but it has still doubled from where it was a year ago (at $23,000). The boutique cryptos are up more: Etherium was $605 last Christmas and is $3,900 this weekend, up 545% in a year.

Even though Biden’s team now admits inflation is here, the White House and Congress are not convinced that all this “helicopter money” caused it. They point to ships at sea, or some other effect. Ed Yardeni tells it more like I see it, saying that inflation was unleashed by the $1.9 trillion American Rescue Plan (ARP), signed by President Biden on March 11, 2021. It was passed only by Democrats, with zero Republicans.

“The ARP, in combination with the Fed’s QE4, has been a textbook example of ‘helicopter money.’ The ARP package provided direct stimulus payments of $1,400 to individuals, extended unemployment compensation, continued eviction and foreclosure moratoriums, and increased the Child Tax Credit while making it fully refundable, plus $350 billion to state and local governments. The ARP was entirely deficit financed. The Fed added to the inflationary consequences of the ARP by monetizing $80 billion per month of the federal government’s debt during the first 10 months of the year. The Fed continues to do so but at a slower pace since November.” (Yardeni Research)

Last February 4, a leading Democratic Party economist – Larry Summers, top economist to both Clinton and Obama – opined in The Washington Post that Biden’s proposed ARP plan was too stimulative and too inflationary and included overly generous unemployment benefits that would “disincentivize the unemployed” from taking jobs. He was proven right, but it took Biden’s team 10 months to finally see it.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The price we pay is not just in food and gas, it’s in chronic worker shortages and supply shortages, since classic inflation involves “too much money chasing too few goods.” We have goods backed up while too much money is chasing those scarcer goods. The labor situation is similar. Employers are bidding up wages, but workers are saying, “No thanks, I’ve cobbled together benefits and earnings elsewhere.”

Larry Summers was right about the ARP’s negative effect on jobs and inflation. The extra $300 per week (above state and local benefits) kept many unemployed (especially with children) from taking jobs.

Now, we’re seeing the same arguments all over again. Treasury Secretary Janet Yellen recently sent the U.S. Senate a memo, “Fiscal Responsibility and the Build Back Better Act,” in which she assures us that the American Families Plan (AFP), if passed, “will leave our nation’s budget in an improved position” even if deficits rise (that’s Orwellian). Moreover, AFP “will not add to near-term inflationary pressures.”

Then again, she and the Biden team didn’t anticipate the inflationary outcome from “ARP” last March.

ARP/AFP? They look alike, sound alike, and may soon act alike: Big spending generates big inflation.

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

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About The Author

Gary Alexander
SENIOR EDITOR

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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