[Editor’s note: This story originally was published by Real Clear Markets.]
By Ken Fisher
Real Clear Markets
Does inflation doom loom? After all, the Fed’s humongous monetary “stimulus” exploded the money supply. Then, too, Uncle Sam drunken-sailored nearly $3 trillion in 2020 COVID “relief”–another $1.9 trillion this year—and up to $4 trillion more under discussion. All sloshing and splashing around. With GDP now nudging pre-lockdown levels, pundits near-universally envision increased inflation. But maybe not! First, despite conventional wisdom, Fed policy may not actually have stoked true money creation. Second, so-called fiscal “stimulus” doesn’t drive hot growth—a historical reality few fathom.
Inflation is always a monetary phenomenon, as Milton Friedman famously taught. Major inflation occurs when money creation grossly exceeds creation of goods and services, stoking overall average prices—these days, globally. Pessimists see that now, with official “money supply” soaring and re-openings sparking pent-up consumers to goose spending. Just note recent CPI jumps, they howl! But those eyeball-grabbing year-over-year inflation bumps are math mirages, year-over-yearing to 2020’s deeply depressed base prices. A reopening pop and related supply and demand imbalances explain month-to-month jumps—fleeting factors.
Monetary theory says the Fed’s gargantuan, bizarre 2020 monetary efforts should have spiked huge inflation already. Why hasn’t it? Partly because much of the “money” the Fed created might not be actual money as traditionally defined—a medium of exchange.
Definitions expanded over the decades from before I was first working 49 years ago. Current money measurements evolved from M0 (the only “money” in the earliest days–hard currency plus non-circulating bank reserves)—to M2, then M3 and finally the Fed’s newest creation, M4, which combines currency, checking and savings deposits, CDs, money market funds, commercial paper, Treasurys with under a year to maturity—and much more. I presume they’ll soon create M5, adding Crypto, high-quality stocks and some commodities basket. Then, M6 with scrap plastic, COVID syringes, Tesla batteries, and sports franchises’ guestimated value. Presently, though, the concern is M4, which soared almost 30% in 2020. But who is chasing goods Friedman-style with short-term Treasurys or commercial paper? They aren’t. They aren’t money. You don’t buy and sell stuff with them—you use money to buy them.
Currently, relatively little “chasing” happens. Monetarists long thought velocity—which measures how often the money supply changes hands—was fairly constant. Today’s limited velocity gauges long-term tanked after the Fed’s 2008 quantitative easing launch—with a subsequent 2020 nosedive toward record lows punctuating the plunge. Rather than stoking growth, last year’s money supply surge probably replaced velocity lost amid crushing lockdowns.
But won’t Trump’s and Biden’s combined fiscal spending supercharge velocity, “overheating” our economy? Unlikely. Since 1971, America passed 16 major “stimulus” efforts. In the 12 months pre-passage, median GDP growth averaged 2.3%, usually with economies already recovering from downturns. And 12 months after? Median average growth slowed to 1.7%. You read that right—growth slowed! No evidence exists suggesting fiscal “stimulus” actually stimulates. None. Almost no one sees that.
Take 2017’s Tax Cuts and Jobs Act. Twelve months later GDP growth slowed—slightly, but slowed nonetheless—from 2.7% to 2.5%. Or, consider 2009’s $787 billion American Recovery and Reinvestment Act, the last of three 2008–2009 packages offering tax credits, “infrastructure” spending and more. The next year saw growth—but barely, at 1.7%. Might growth have been less without the spending? Maybe! Or maybe faster! That is unknowable—no “control set” exists. Simply no hard evidence supports “stimulus” as turbocharging growth.
One key reason: The notion approved “stimulus” rushes into economies is myth. No project is “shovel ready.” Biggies require endless permits, studies and approvals from multitudinous far flung government jurisdictional agencies. Snail-like progress means later budgets can shrink or even scrap the projects. (E.g., former California Governor Jerry Brown’s infamous “bullet train” boondoggle.)
The past year offers further reasons “stimulus” usually doesn’t stimulate. Surveys suggest Americans collectively spent roughly a quarter of their COVID stimulus checks, saving or paying down debt with the rest. New York Fed data echo this, showing credit card balances fell -13.8% y/y in Q1 2021. Loan growth surged on 2020 pandemic relief, but that faded fast—lending has trended lower since June 2020. It all points to post-pandemic growth and inflation paralleling pre-pandemic trends after a brief slump and bump.
Recent price jumps in commodities like oil, steel and lumber involved producers guessing wrong in 2020, shuttering capacity while underestimating the reopening rebound’s strength and speed. Cutting capacity is always faster than restarting or adding more. So the fast bounce-back surprised producers with too little relative capacity. Rising prices encourage some to ramp back up. But it takes longer. Eventually, supply will rise like always, slowing prices’ climb. Prices are incentives—Econ 101.
Even if inflation endures longer and bigger, markets aren’t doomed. Inflation initially escalates slowly, leaving investors time to adjust. Stocks weather initial price jumps well. Companies adapt, passing on costs to buoy profits. Stocks’ inflation-beating ability is one reason many retirees require equity exposure.
Remember: Surprises drive markets—and stocks are well aware of inflation worries. May’s Bank of America survey showed global fund managers overwhelmingly expect above-trend growth with above-trend inflation. Major media herald inflation dread, big or small. Inflation’s surprise power is caput.
Inflation fears’ fast ascent is sneakily bullish—not bearish. It shows broadly warming sentiment hasn’t gotten too darned frothy. So leave the fretting to pundits and enjoy more of this late-stage bull market’s upward climb ahead.
[Editor’s note: This story originally was published by Real Clear Markets.]
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