Could They Have Been More Wrong About Inflation in 2020?

I recently ran across a video produced by CNBC back in July 2020. It is titled “Why Printing Trillions of Dollars May Not Cause Inflation.”

That aged poorly, didn’t it?

And people wonder why I keep saying you should be skeptical of mainstream narratives.

The video was produced at the height of pandemic stimulus and money creation. The video notes that the Fed’s balance sheet had eclipsed $7 trillion. That was still nearly $2 trillion less than the peak at just below $9 trillion. Even today, the balance sheet remains north of $8 trillion.

The narrator begins by pointing out that some economists were worried about inflation, and she plays a clip of an economist quoting Milton Friedman, who said, “Inflation is always and everywhere a monetary phenomenon.” But the narrator goes on to assert that we really didn’t need to worry about inflation.

Supply shocks have driven up the price for some goods over the past few months. Yet recent history suggests inflation is more likely to stay low for a long time…”

Ironically, the economist who quoted Friedman later boldly proclaims, “The idea that there’s going to be an outbreak of inflation, you know, 4 percent, 5 percent that is just not on the horizon.”

And I bet that economist still has a job.

Fast forward to today — low price inflation? Not so much.

Price inflation remains stubbornly high three years after CNBC produced this video.

Definitions Matter

The problem with the video is it misdefines inflation as “an increase in the prices of goods or services over time.”

This definition of inflation muddies the water (and that’s on purpose).

The proper economic definition of inflation is an increase in the amount of money and credit — or put another way, an expansion in the money supply.

Price inflation, as Friedman alluded to, is a consequence of monetary inflation.

When you use more precise definitions, it immediately reveals the absurdity of this video. It is trying to make the case that inflation doesn’t cause inflation.

This was the generally accepted definition of inflation as late as the 1980s. But over the years, the government, along with its apologists in the corporate media and academia, altered the definition to suit government purposes. They methodically conflated monetary inflation and price inflation until there was no distinction between the two. The standard definition of inflation bandied about today is nothing more than government propaganda.

Economist Ludwig von Mises explains the problem with this change in definitions.

“People today use the term `inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.”

This video proves Mises’ point.

You Could See Price Inflation Coming Like a Freight Train

It’s true that monetary inflation doesn’t always manifest in price inflation. This was the case after the 2008 financial crisis. Despite three rounds of quantitative easing and a nearly $4 trillion increase in the Fed balance sheet, price inflation as measured by the CPI remained relatively tame. But that doesn’t mean there was “no inflation.” There was a massive surge of inflation to the tune of nearly $4 trillion. (Really a lot more than that when you factor in the credit expansion thanks to artificially low interest rates.) However, due to other economic factors, it didn’t primarily manifest as price inflation. Instead, we saw inflation of asset prices such as real estate, the stock market, and even art.

And the fact is, we don’t really know how the money printing after the 2008 financial crisis impacted consumer prices. Economic theory simply says monetary inflation will lead to prices across the board being higher than they otherwise would have been. Had it not been for the massive injection of money into the economy, we might have enjoyed lower prices instead of “moderate” price inflation. We’ll never know.

Regardless, the fact that CPI didn’t surge after the Great Recession monetary stimulus gave Keynsian economists married to theories rooted in “aggregate demand” a false sense of security. The video claimed, “Economists say there’s been a break in the link between money creation and inflation in recent years as the banking system has become more complex.”

Sorry. Complexity in the banking system doesn’t supersede economic laws.

The video does make a legitimate point. Money created by the Fed doesn’t go directly into the hands of consumers. It is added to bank reserves. It only circulates into the broader economy if banks choose to lend. If the newly printed money stays in the financial system it won’t show up in CPI. Instead, the inflation will manifest in asset markets as it did after the Great Recession. We even saw this in the latter part of the lockdown era as the stock market rallied despite the economy still effectively shut down.

But a lot of the pandemic-era stimulus went directly to consumers. There were generous unemployment benefits, direct stimulus checks, and all kinds of loan programs. It was pretty obvious that this monetary inflation would quickly bleed into consumer prices. And yet, virtually everybody in the mainstream missed it. Even after it started showing up in CPI, everybody swore up and down it was “transitory.”

It’s not that they were wrong. They were wildly wrong. Like, not even in the ballpark.

And economics told them it would be wrong.

Sadly, a lot of economists don’t seem to really understand economics. This is what happens when everything revolves around mathematical formulas and “observation” devoid of sound theory.

This video should give you pause when you hear the same talking heads on the same networks insisting the economy is strong, there won’t be a recession, and the Fed has won the inflation fight.