ECONOMYNEXT – US inflation has hit 5.0 percent in the 12 – months to May 2021, up from 4.2 percent in April 2021, in line with warnings made by classical economists.
The US broad money supply – measured on several metrics – had been growing at record rates, indicating that the credit system was alive and kicking, unlike shortly after the collapse of the housing bubble fired by the Fed.
In 2020 the US M2 money supply calculated by the Fed has grown 26 percent the fastest since 1943.
Given that the Fed is planning to monetize 120 billion dollars of debt a month, a 12 percent growth is expected in 2021, Professor of Applied Economics at Johns Hopkins University Steve Hanke said earlier in 2021.
“We’ve never seen anything like this,” Hanke, who was recently named a top economic policy influencer in Washington said earlier in 2021.
“The 26 percent growth last year was the highest since 1943 and the 12 percent growth rate that is baked in the cake for this year is double the average over the last 20 years.”
He had said inflation may go to the 3 to 5 percent range rather than a 2.4 percent expected by the Fed. The 5.0 percent threshold was reached in May.
“There is a huge build up of liquidity in people’s pocket books and they will spend it as the economy starts opening up,” Hanke said.
“That means velocity will pick up. So not only do we have the quantity which has exploded but also the velocity, which had kind of collapsed temporarily would get back on the trend rate.”
Hanke said that money supply Divisia M4 measured by the Centre for Financial Stability in New York – which has generally been a better guide than the Fed was also running at record rates.
Divisia M4 had since started to slow.
The All Items inflation was the highest since 2008, when the bubble fired by the Fed broke following rate cuts.