ECONOMYNEXT – Inflation in the US is likely to remain at 6 percent or higher in 2022 and 2023 even if the Fed starts tightening now as there is a lag of 12 to 24 months in prices responding to its actions, economist Steve Hanke has said.
US Consumer inflation hit 7.5 percent in January 2022 up from 7.0 percent in December, as forecast by classical economists who watched broad money growth.
The Fed has still not started tightening, but is buying US Treasuries despite raging inflation. ‘Tapering’ means excess liquidity is still being dumped into the banking system, but at a slower pace.
US broad money measured by M2 is currently growth at 12 percent. Typically there is a lag of 12 to 24 months from the time money supply expands to it starting to show up in the price index.
There was also a small possibility that Fed will panic tighten too fast and trigger a recession which would create stagflation, Hanke, is a Professor of Applied Economics at the Johns Hopkins University in Baltimore said.
The Fed will have to bring US broad money measured by M2 to around 6 percent to generate its 2 percent inflation target based on growth trends.
“The Fed is doing a lot of talking but they are not doing any tightening,” Hanke said in a recent interview with Kitco.com an online portal. “Money supply measured by M2 is still growing over 12 percent on a year over year basis.
“And to actually hit their inflation target of 2 percent a year they will have to bring it down to about 5 to 6 percent. That is about half of what it is now.
“Let’s assume they do that right away. We will have inflation over 6 percent over 2022 and 2023 and into 2024.”
Hanke last year accurately predicted a 6 to 9 percent inflation for the US for 2021 in a Wall Street Journal opinion piece after warning much earlier that the Fed would overshoot its 2 percent inflation target.
US inflation will overshoot target, Powell delusional: Hanke“We had no crystal ball. We had the quantity theory of money,” Hanke said. “It is money supply stupid.
“If you have a surge in money supply, after the lag of 12 to 24 months, inflation gets into the system. As Covid exploded in the March of 2020 money supply measured by M2 in the United States has grown over 38 percent.”
Money produced by the Federal Reserve (reserve money or the monetary base) does not necessarily produce strong credit and broader money growth if the banking system is broken and they do not lend, such as in the aftermath of the bursting of the housing bubble.
However if there is a healthy banking system, Fed money is rapidly translated into credit and pyramiding broader money.
The US also gave ‘stimulus’ checks directly to people, further boosting demand, and then blamed ‘supply chain disruptions’ as demand for durable goods in particular came roaring back.
The Fed also dismantled a repo window which had earlier encouraged banks to keep excess money in the agency radically changing the monetary framework from the Janet Yellen years.
Fed is expected to end printing by March and start raising rates to reign in money growth.
The Fed could also tighten too fast and trigger a recession which would result in stagflation as it had done in the past Hanke said.
“I am not going to say it is going to happen. But it might happen,” Hanke said. “This inflation has gone up now. It could spook the fed so much and frighten them that they start increasing interest rates too rapidly and panic – they have done this before, because they really don’t know what they are doing.
“If they panic and raise interest rates too rapidly and too high we could easily have a recession. And then we could have the old stagflation problem. We could have a recession and would have the inflation.”
Powell had articulated unusual views – for a Fed chief – based on post-Keynesian theory despite the agency’s past experience in the 1920s, the 1970s, the 1980s and the run up to the housing bubble.
In a February 2021 congressional testimony, Louisiana Senator Kennedy questioned him about the 26 percent M2 growth at the time.
“Well, when you and I studied economics a million years ago, M2 and monetary aggregates generally seemed to have a relationship to economic growth,” he said.
“Right now, I would say the growth of M2, which is quite substantial, does not really have important implications for the economic outlook. We have had big growth of monetary aggregates at various times without inflation, so something we have to unlearn, I guess.”
Hanke said at the time that Powell was ‘delusional’. (Colombo/Feb10/2022)