by Gary Alexander

March 29, 2022

The war in Ukraine is now a month old, but the Fed’s experiment in Modern Monetary Theory (MMT) is two years old. This commodity price chart (below) turned vertical almost two years ago, with only the latest squiggle coming after Russia’s invasion of Ukraine February 24, 2022.

Commodity Price Indexes Chart

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

President Biden blames Russia and Big Oil’s greed for high gas prices. While gas prices are up about $0.75 since Russia invaded Ukraine, they are up $1.85 since Biden took office. Some leading Democrats, like Elizabeth Warren, blame domestic oil companies, but her Party and her green allies insisted on closing domestic supply pipelines. They seem to imply it is “greener” to buy energy from despots in Russia, Venezuela, or Saudi Arabia than those on our own continent.

Critics of Big Oil also show willing ignorance of how domestic energy distribution works. There are about 150,000 retail gas stations in the U.S., and big oil companies own only about 5% of them. The other 95% are small mom & pop operations with low profit margins of only $0.10-$0.15 per gallon, subject to stiff competition via local “gas wars.” Blaming these station owners for high gas prices is ridiculous, since these small business folk need to offer competitive pricing, and the price of a barrel of oil is subject to constant bid-and-ask in free market commodity pits.

No, inflation’s primary cause was adding $6 trillion in money through “stimulus” spending and the Fed’s “quantitative easing” (QE) in the last two years. Now that the Fed’s QE splurge is over, giving way to interest rate increases, some think this will halt inflation. History has not been kind to this simplistic thinking. Nearly every inflationary siege has ended in a recession (chart, below).

Consumer Price Index Chart

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

On March 16, the Fed implied seven rate increases this year and four next year, taking the Fed funds rate up to 3% by year-end 2023. That would add $825 billion to the annual cost of servicing the $30 trillion in public debt, and that may not “lick inflation,” so they may have to keep raising rates, as in 1979-81, when the new Fed Chair Paul Volcker raised rates deep into double-digits.

Industrials Commodity Price Index and Copper Futures Price Chart

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

Modern Monetary Theory (MMT) in Action

Modern Monetary Theory (MMT) was tried in a minor way in Europe from 2015 on, primarily with negative interest rates without much fiat money, but the U.S. version brought MMT out of the academic test tube experiments and into the full flower of multi-trillion-dollar print runs.

Dr. Stephanie Kelton wrote the Bible on MMT: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, published at the peak of the first COVID-inspired monetary stimulus packages in June 2020. Basically, MMT proposes that a sovereign government can spend new money with abandon, creating full employment and widespread prosperity, as long as it prints its own currency. Most economists, even pro-government Keynesians like Dr. Lawrence Summers, reject this “free lunch” formula, since history shows that inflation is inevitable, usually leading to hyper-inflation, but the MMT crowd says that this can be fixed with higher taxation.

Sure, try raising taxes in an election year – or any year when household prices are rising rapidly.

This is not a new theory, just an academic gloss on an old joke. Milton Friedman used to suggest “helicopter money” as a solution to any social problem – just drop dollar bills out of the sky. Former Fed Chair Ben Bernanke repeated this theory in 2002 and thus became “Helicopter Ben.”

From February 2020 – before COVID struck – through February 2022, the U.S. Treasury’s debt load held by the public grew by $6.1 trillion, from $14.8 trillion to $20.9 trillion (+41.2%). As a result, M2 money supply soared by $6.4 trillion, from $15.4 trillion to $21.8 trillion (+41.6%).

Federal Reserve M2 and Deposits Chart

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

Congress and Presidents Trump and Biden must share the blame for this experiment, although the economic emergency was far more severe in 2020 than in 2021, when millions of jobs went begging and stimulus checks were no longer needed. In 2020, the stimulus created a “V” shaped recovery, so the money pumps could have been shut off by Fall 2020, but that did not happen.

Real Gross Domestic Product Chart

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

The Consumer Price Index (CPI) first rose above the Fed’s 2% “target” rate in March 2021, just one year after QE4 began. Its latest reading is +7.9% through February 2022. The durable goods prices rose much faster: 18.7% in 12 months. Used cars are up over 30% and new cars are +18%.

Yearly Percent Change Consume Price Index Chart

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

The median existing home price is up 33.4% in the last 24 months, which means that rents will skyrocket, because first-time homebuyers are priced out of the housing market and are forced to rent. (The Hawaii home I’m renting for a week costs about as much as a deluxe cruise cabin).

Not surprisingly, Fed Chair Powell is among the inflationary cause-deflectors and shape shifters, denying having any role in today’s runaway prices. A year before COVID, he was against MMT before embracing it. In his March 16, 2022, post-FOMC press conference, Powell blamed Russia for commodity inflation when most of it was already in place, and he blamed other rising prices on strong demand when “supply constraints are limiting how quickly production can respond.”

To solve the problem, Powell said the Fed would use its “tools” (using that word 18 times), when a single tool was all he offered, since he mentioned “raising rates” as the only tool in his toolbox.

Higher taxes? Recessions? Deeper deficits? High inflation? There is no “free lunch” with MMT!

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

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
The 2008 High in Commodities is in Play

Sector Spotlight by Jason Bodner
New Sector Leaders as Stocks “Spring Forward”

View Full Archive
Read Past Issues Here

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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