In an amazing turn of events, it turns out that the government spending a massive amount of money causes inflation. Who knew?
According to researchers at the Federal Reserve Bank of San Francisco, U.S. consumer prices have surged more than in other developed economies because o large government stimulus…(Bloomberg)
- “Fiscal support measures designed to counteract the severity of the pandemic’s economic effect may have contributed to this divergence by raising inflation about 3 percentage points by the end of 2021,”
The research found direct links to peaks in spending and two big stimulus efforts. The CARES Act in March 2020 and the American Rescue Plan Act a year later…
- “Both Acts resulted in an unprecedented injection of direct assistance with a relatively short duration. In contrast, real disposable personal income for our OECD sample increased only moderately during the pandemic,”
However, even with the spike in inflation, researchers found the alternative of worse…
- “However, without these spending measures, the economy might have tipped into outright deflation and slower economic growth, the consequences of which would have been harder to manage,”
As Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon.” I will keep quoting this for as long as it takes for people to get it. Of course, adding money to the system is going to create inflation. The questions are is it the only reason and what was the alternative. This report finds that government spending is only half the problem meaning labor costs and supply chain disruption are responsible for the rest. The answer to the other question is the alternative was deflation which almost all economists agree is always a worse result in the long run. So now that we definitely know what caused it let’s get to work on fixing it. Sound good?