The Mainstream Has the Inflation Story Backwards

The mainstream blames inflation on “supply chain bottlenecks.” But they have it completely backward. In reality, Federal Reserve-created inflation is causing the supply chain mess.

According to Biden administration talking points, the economy is booming. Americans are flush with cash. And they are demanding lots of goods. The supply chain simply can’t keep up. That’s why we’re seeing empty shelves and rising prices. Transportation Secretary Pete Buttigieg summed up the mainstream mantra.

 Demand is up … because income is up, because the president has successfully guided this economy out of the teeth of a terrifying recession.”

White House spokeswoman Jen Psaki told a similar tale. She said we have supply chain problems because “people have more money … their wages are up … we’ve seen an economic recovery that is underway.”

This sounds like a lot of spin. But in one sense, the mainstream is right. As Mises Institute Senior Editor Ryan McMaken pointed out in a recent article on the Mises Wire, they are correct when it comes to consumer demand and spending, even if they got it right for the wrong reason.

As Mihai Macovei showed earlier this month, the global volume of trade and shipping volume in 2021 have actually exceeded prepandemic numbers. For example, in the port of Los Angeles, ‘loaded imports’ and ‘total imports’ for the 2020–21 fiscal year (ending June 30, 2021) were both up when compared to the same period of the 2018–19 fiscal year. In other words, it’s not as if little is moving through these ports. In fact, more is moving through them than ever before. That suggests demand is indeed higher.”

But why is demand so much higher? As Psaki said, Americans have more money in their pockets. Wages are up nominally. But it’s not because the economy is booming. As McMaken points out, it’s due to inflation.

If we look at the immense amount of new money created over the past eighteen months, we should absolutely expect people to have more money sloshing around. But this also means a lot more pressure on the logistical infrastructure as people buy up more consumer goods. The idea that supply chain problems are ‘driving inflation’ gets the causation backward. It’s money supply inflation that’s causing much of the supply chain’s problems. Not the other way around.”

Money creation has slowed somewhat in recent months, but the Federal Reserve continues to print money at breakneck speed. As of September 2021, M2 has increased from $15.2 trillion to $20.9 trillion since February 2020. In the latest period alone, M2 increased by $163 billion. A lot of that money went into the banking system and stock market. But Uncle Sam also handed a lot of that money out in the form of stimulus.

Initially, Americans saved a lot of that stimulus money. They didn’t have much of a choice with the economy on lockdown. Personal savings hit a historic high of over 25%. But savings collapsed over the summer and were back under 8% as of September. McMaken says “the public is now flooding the economy with its former savings.”

And he points out the obvious: the American appetite for spending on consumer goods hasn’t gone away.

Yet there are many reasons to suspect this spending spree is unsupported by actual economic activity and is a phenomenon of monetary inflation. For example, today’s tsunami of spending raises questions when we consider there are still about 5 million fewer people working in the American economy than was the case in early 2020. That means fewer people being paid wages. Without monetary inflation, an economy with millions of fewer workers suggests there should be less spending.”

McMaken points out another economic reality that is in play. Spending tends to increase when inflationary expectations increase. If people think the value of money will decline in the future, the demand for money will decline as well. Economist Ludwig von Mises explained this phenomenon.

Once public opinion is convinced … the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size.”

Meanwhile, interest rates are being held artificially low by Fed policy. This further incentivizes spending. As McMaken put it, we live in “a yield-starved” world.

That’s OK for hedge funders who can participate in carry trades and other high-yield forms of investment. But regular people are stuck with interest rates that don’t keep up with price inflation. So it makes more sense to spend dollars rather than save them.”

So, yes, Americans do have more money.  And yes, they are driving demand higher through their spending. But as McMaken says, this is just what we should expect in an inflationary environment.

We should expect demand for everything (but money) to be up.”

So, no, it’s not that Joe Biden has ushered America into a booming economy. This isn’t a sign of a healthy economy at all. It’s an inflationary bubble.

And the real question is how long can this inflationary boom last?