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US inflation will overshoot target, Powell delusional: Hanke

ECONOMYNEXT – US inflation is likely to go as much as 5 percent with broad money supply beginning to grow at unprecedented rates and Fed Chief Jerome Powell was ‘delusional’ to suggest that there was no link between money and inflation, a top economist has said.

In 2020 the US M2 money supply calculated by the Fed has grown 26 percent the fastest since 1943 and 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.

“We’ve never seen anything like this,” Hanke, who was recently named a top economic policy influencer in Washington said in an interview with CNBC.

“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 said inflation may go to the 3 to 5 percent range rather than a 2.4 percent expected by the Fed.

“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 temprprarily would get back on the trend rate.”

As the economy picked up unemployment would also fall.

Clearly Delusional

In an interview with Kitco.com, Hanke said Fed Chief Jerome Powell was ‘clearly delusional’ to suggest that there was no link between money and inflation. Powell had said that there was no link between M2 and economic growth. “The relationship with the money supply is something we have to unlearn.”

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Hanke said Divisia M4 money supply produced by the Centre for Financial Stability has generally been better than Fed aggregates. Fed numbers are also showing the same basic trend.

“Chairman Powell is clearly delusional,” Hanke said. “I cannot believe that the Chairman of a central bank actually said that.

“But I can because they are all singing from the same song book. They produce money and they are telling us that money is irrelevant.

“He is refusing to talk about the product that the Federal Reserve is in control.

“And he is saying it does not make any difference what the Fed does. Well most people think it makes a lot of difference what the Fed is doing. This is a ridiculous statement just on the face of it.”

Hanke said there was a strong link between broad money and nominal GDP (real GDP plus inflation).

Great Monetary Debacles

The US Fed has made some of the biggest monetary policy debacles in the history of central banking which are usually labelled with the prefix ‘Great’.

In the 1920s after the Fed discovered open market operations it fired the Roaring 20’s bubble, the collapse of which ended in the ‘Great Depression’ leading to the Gold Standard breaking in many countries after the Fed devalued in 1935.

The Fed finally killed the remaining vestiges of the gold standard in 1971 after targeting an output gap under Arthur Burns leading to the collapse of Bretton Woods, floating exchange rates and the Great Inflation.

From 2001, Alan Greenspan, was persuaded by Ben Bernanke, to fire the ‘mother of all liquidity bubbles’ with near zero interest rates which ended in burst housing and commodity bubble, now called the Great Recession or the Great Financial Crisis.

US stocks have been shooting up in classic signs of a mal-investment bubble but Powell had disclaimed responsibility. Commodity prices have also started to edge up.

Modern Monetary Theorists also claim that printing money does not cause inflation.

When credit bubbles collapsed historically – such as after the Fed Housing and Commodity bubble collapse in 2008/9 led to a credit collapse – such ideas raise their head. Among the most well-known are such ideas were spread by Scottish Mercantilist John Law. (Colombo/Apr03/2021)

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