How The U.S. Made Inflation Worse

Not a bad primer video from CNBC on the Fed’s policy mistakes, which we all are now, literally, paying for.

I would add that monetary policy is a black box, mainly because we can’t define the money supply, much less measure it.  Using your brokerage account to write checks to pay for gas and groceries, for example, shouldn’t it be counted as part of the money supply?  Ditto for crypto, among others

Exogenous vs. Endogenous Money Supply 

No distinction either between exogenous money (created by the Fed) and endogenous money created by the private sector.  The Fed tries, and we stress, tries to control the endogenous money supply by interest rates and the exogenous money supply by its balance sheet.

Endogenous money is primarily created by leverage and is most likely easier to bring inflation down as assets deflate and credit slows.

The current inflation we are experiencing was mainly driven by exogenous money – Fed printing- and is much harder to break until quantitative tightening really begins to bite.  Think middle of 2023.

So, realize, folks, if asset prices are increasing, such as stocks, with a 10 percent inflation rate, it is inflationary.

The Fed has a tiger by the tail, mainly of its own doing, by allowing monetary policy to be, in the words of my good friend, Professor Constantin Gurdgiev, “hijacked by Goldman Sachs and Black Rock.”  Let’s throw in Jim Cramer just for fun.

The body politic gets it is unfair, and we see the political angst played out in today’s society.

Even a monkey will revolt against unfairness and inequality.

Money Quotes:

The two following money quotes from the vid could have been lifted straight from the Global Macro Monitor.

  • If we were actually measuring inflation in a consistent manner, the peaks in the seventies and eighties are actually much more similar to the peak today than we would have initially thought.”

    See our post,  Today’s Inflation Rate And Nolan Ryan’s Fastball

  • “So I think at this point the Fed has to stick to its guns, even if that means taking speculators down.  And that really is what has scared the Fed in the past.  The Federal Reserve is supposed to make monetary policy in the whole of the public interest, not just that of investors. And this going to be a test of which they have not really had to take since 1981.”

    We have written many posts on this issue, but see this one, in particarlur,  The New “Supply-Side Economics” Fueling Asset Bubbles

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21 Responses to How The U.S. Made Inflation Worse

  1. Joe R. says:

    Good article, Gregor with great links.

    I am curious how the equivalent situation pans out here in the EU with the ECB in the role of the Fed obviously. They are due to stop QE in the 3rd quarter. I think all Gov. supports here in the EU were more ‘progressively’ targeted than in the US (by the sounds of things) but inflation is still rampant anyhow. So, I am not so sure that idea about the savings of the wealthy being such a specific driver is a valid one.

    As an aside on endo and exo money – for the late phase of the Celtic Tiger there was a big feedback loop between Government expenditure and credit money creation via a big Stamp Duty (10% or so) on housing which was booming. What was essentially a variable windfall type tax was used to back big permanent public pay rises in the annual Government budget (for unsackable civil servants, teachers, etc) and so resulted yet more big mortgages and stamp duty. Much of the Stamp Duty was created by credit. Then housing output crashed from 90K mainly speculative mixed units to just 10K self build countryside houses per annum in 2/3 years and prices from 350K to 225K average. Stamp Duty evaporated but the Government was left on the hook for public salaries and pensions. Obviously, being Ireland, yhd banks were bailed out, S.F.A. houses were repossessed and no public servants lost jobs and the IMF etc foisted thd cost on the remaining workers via austerity while a generation emigrated. That tax inversion craic helped save the day in the end. That and the fact were weren’t Greek.

    BTW this is how you turn the IRA’s old political wing from complete electoral pariahs to by far and away biggest single political party on the whole island in 15 years or so.

    I guess what I am saying is when I hear about neat theories where these endo and exo monies are described as clearly separate things I know it the case that in reality the situation is more intertwined and complex.

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  21. RobG says:

    Since you seem astute enough to occasionally pull concepts from heterodox schools of economic thought when they are explanatorily helpful, I was wondering what GMM would make of the idea that the current inflation has actually prevented a larger debt crisis.

    The idea comes from Hyman Minsky’s Financial Instability Hypothesis, which for my money is probably the most cogent and least ideological explanation for how financial cycles work. There, he postulated that when a debt bubble collapses after a prolonged period of pervasive Ponzi borrowing, the disconnect between firms’ high levels of debt and the comparatively paltry cash flows available to service them can only be brought back into ‘equilibrium’ via a collapse in asset prices and a debt crisis that wipes out financial institutions—a la 2008 and the 1930s—*unless* the economy is in an inflationary state. In the latter case the inflation augments corporate cash flows and devalues the pre-existing debts such that firms can continue to meet their obligations, but are unable to invest more and expand—thus resulting in unemployment, albeit not on the level of a full-scale depression. This was his explanation for the stagflation of the 1970s.

    During the pandemic contraction, I remember GMM making a post hypothesizing that we were witnessing a debt bubble popping in the corporate bond market and an accordant deleveraging—I wanted to know what you make of the idea that the post-lockdown inflation has prevented this deleveraging from spreading into a full-on debt crisis.

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