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Massive inflation has become likely as twice as many dollars have been created and are afloat in the market now compared to the beginning of 2020.When the number of dollars increases without a corresponding increase in productivity, the value of each individual dollar decreases. The old term for this was “printing money.” The new term that describes and obscures this approach is “Quantitative Easing,” where the Federal Reserve prints paper dollars to purchase debt from other departments in the U.S. government. Those dollars are then used to fund the massive spending that supports efforts to avoid the consequences of the lockdowns.
QE first took off during the early Obama administration when it was used to fund the 2009 Stimulus Package. Over the next fives years, trillions more dollars were created. The Fed leveled the process for three years and then gently reduced it during the Trump administration’s first three years. But in 2020, the pedal hit the metal and nearly $4 trillion was (digitally) printed and delivered to the Treasury Department.
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To balance its books, the Fed treats the government bonds that it purchases as assets and carries them on its financial statements as though they are worth full value. An additional trillion or two of QE are in process right now.
Financial markets traditionally react to wild increases in money supply two ways. Equity markets increase, oftentimes a lot. “Bubbles” occur in various asset classes: stocks, real estate, gold, other commodities. Interest rates spike as lenders realize the future dollars they will receive in payment will be worth less than the money they lend today. That hasn’t happened, yet.
That leads to the question, Where is the inflation? The answer: As the Fed has been pumping out dollars, the American consumer has been socking them away rather than spending them. The consumer savings rate is the highest it’s been in modern history. There are different theories about why, but it’s a fact that trillions of dollars are currently off the market, markedly reducing inflationary pressure. At some future date, however, people’s confidence will return, dollars will come out of hiding, and inflation will roar into the headlines with a vengeance.
Prepare now by building efficiency into your business. That’s the antidote for what is sure to happen.
