Clouded Crystal Ball
Not everybody sees an inflationary hell around the corner. In a recent post, titled “Return of the Inflation Mongers,” George Selgin, director of the Cato Institute’s Center for Financial and Monetary Alternatives, dismissed predictions of imminent disaster, citing Congdon and Hutchinson.“At least in the short term, there is no way to put them back to work and make them productive. The output they would have produced is lost forever; a restaurant meal not served in April cannot be served in August.
“Hence, the extra money inserted into the economy has no goods to buy. That is the position we had in World War II — ‘too much money chasing too few goods.’ It caused inflation.”
Opposite Directions
Recent interviews with economists and other analysts by The Epoch Times suggest Hutchinson’s isn’t the only cloudy crystal ball, because the CCP virus—also known as the novel coronavirus—and the nationwide lockdowns it prompted have sparked multiple economic reactions, including some pulling in opposite directions.On the other hand, Congress has approved an estimated $4 trillion in pandemic relief measures, with a result, Hutchinson pointed out, that the money supply expanded 7.7 percent in the six weeks ending April 2. If the inflation rate corresponded to this increase in the money supply, over a year that would be 90.4 percent.
But Selgin sees a temporary reprieve in the opposing trends, telling The Epoch Times that he doesn’t “want to create the impression there is nothing to worry about. That’s not true ... we have a lot of sensationalist reporting on both sides, though mostly on the inflation side. That tells us that maybe we don’t have to worry about either.”
Selgin insisted, however, that “we’re only safe for about six or seven months. After that, we’ll have to start to worry more about inflation.” Over the long term, Selgin said he is optimistic that the Federal Reserve Board (FRB) “will beat deflation.”
“Any time you have a crisis like this where the demand for money goes up and people are just holding on to money and not spending it, you should not, if you’re the central bank, you should not worry about inflation, you should try to prevent a collapse.”
But, Michel cautioned, “there is a limit and unfortunately nobody knows what it is and there is a length of time that you can get away with it and a point in time when it comes back to bite you, but nobody knows exactly when that hits.”
Ebeling is the BB&T distinguished professor of Ethics and Free Enterprise Leadership at The Citadel in South Carolina.
Politicization
Both Ebeling and Michel pointed to what they consider an even larger long-term economic and political problem resulting from the official responses to the CCP virus pandemic, the politicization of the FRB.Ebeling said the FRB “played a trick” during the Great Recession of 2008 with what was called “quantitative easing” and the creation of an estimated $4 trillion created in the banking system.
“Many of us then asked, ‘How can you create so much money, and then it multiplies through the banking system without having price increases?' But, of course, it didn’t,” he said.
The reason inflation didn’t come about then was because the FRB created the new money in the banks, but then paid them a higher interest rate to hold on to it, according to Ebeling.
Asked if he is comfortable with the expanded role of the FRB in making loans to particular businesses, Ebeling said he thinks “institutionally, this is a disaster. It is so threatening to set precedents of micromanaging politicization of lending and political decision-making in who you support for business.”
China’s central bank micromanages that nation’s economy “as a totally politicized financial market, which means it’s not telling the truth about real supply and demand, what the real cost of borrowing could or should be,” he said.
The FRB’s expanded role via the pandemic response is “creating a political lending institution rather than a market-based lending institution,” he said.
Michel agreed. “This puts [the FRB] in a terrible position because now it has Maxine Waters and Ted Cruz, anybody can say” that a specific firm or group should get money from the FRB without worrying about inflation.
“I’m not saying it won’t get reversed and it won’t be kept under control, but you’re a heck of a lot closer now to a bigger problem,” Michel warned.
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