Questions over inflation's causes are hotly debated by the Federal Reserve Board and so-called experts. Theories range from "it’s only transitory," or "prices are coming back from the pandemic," and so on.
This tells me that no one knows, or is at least not telling.
The simple fact is, that the major cause of high monetary inflation is caused by massive injection of cash as a result of a trillion dollars spent by our federal government.
Unfortunately, this money only went to the consumer side or to asset purchases (likely for the purpose of buying votes).
Practically nothing went to the production side (capital investments, employment) of the economic ledger.
The classical result was that too many dollars chased too few goods resulting in inflation.
We can see the rest: 4.5% increase in food prices, 10.5% increase in used car prices, 6.3% increasing air-fares, 10% increase in imported goods, etc. The overall June inflation, annualized, exceeded 9.5% (The Wall Street Journal), compared to only 8.4% in May, 2021.
Here are my answers:
To start with, let’s look at the money supply side.
In December of 2019 the M3 (spendable dollars) stood at 15.33 Trillion.
In July of 2020 it stood at 18.3 Trillion and in April of 2021, at 20.1 Trillion (about even with our gross domestic product, GDP).
This indicates a money supply increase of $2.4 trillion or 13.1 % for the 12 month period ending June 2021. If this amount would have been balanced out by an equal amount of production increases, there would have been no inflation.
As we can see below, this did not happen.
Now look at the labor representing the supply side of the economy.
In June of 2020, the U.S. labor force stood at 142 million persons; in June of 2021 there were 151 million, an increase of 9 million persons or 6.3% of the labor force.
This leaves $2.4 trillion of new money a yearly increase of 13.1 % (consumption).
Offsetting this, we have a 6.3 % increase in labor (production).
This means, there is an excess of 6.8 % available for consumption, extra money which can only be spent with increase in prices (demand exceeds supply).
Hence we have inflation.
This prognosis compares well with the June 2021 official June inflation rate (CPI) of 5.4% or, projected annually, of 9.3%, indicating, that other factors such as time-lag or labor productivity are at play.
Nevertheless, a causal relationship between M3 money supply and labor based production cannot be denied.
Federal Reserve Chairman Jerome Powell intoned that he will increase the discount rates (make credit more expensive), should the rate of inflation accelerate further.
This is counterproductive since credit costs will filter through into the cost of goods.
While this may absorb some excess buying power, it will not reduce inflation (prices are still higher due to expensive credit).
There are only two ways to get rid of inflation:
- Decrease the rate of printing new money, and/or
- Increase the quantity of goods (hire more labor).
If anything, then we will see a further increase in the rate of inflation since the government plans to spend an additional trillion dollars while there is little slack left in the employment sector, since the un-employment already is down to 5.8%.
Dr. Hans Baumann, a former Corporate Vice President and founder of his company, is a well known inventor, economist, and author having published books on scientific, economic, and historical subjects. Read Dr. Hans Baumann's Reports — More Here.
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