9/3/2023 0 Comments Lyn alden oil![]() ![]() This could take the form of higher spending, or could take the form of unfunded tax cuts, or both. If fiscal policymakers realize that the economy is stagnant and banks aren’t lending, they can pass fiscal bills to go around the banks (or through the banks by backstopping loans for them) and get money directly to consumers and businesses, aka “helicopter money”. Lyn Alden, US Treasury, US Federal ReserveĪfter all, if policymakers realize they are in an environment of persistent currency disinflation from various trends, what do they do? They print currency!Īt first it starts from monetary policymakers expanding the monetary base, but then it spreads to fiscal policymakers when the situation remains stagnant (since monetary policymakers, unlike fiscal policymakers, cannot directly spend). After that stagnated for a while after the 1930s peak and ran into the next recession/war, fiscal spending heated up and caused the next leg of devaluation, which was inflationary. ![]() In the years after those 19 peaks, there was a deleveraging event in debt-vs-M2, which was not very inflationary, and was led primarily by monetary policy. Here’s how I put it in my September 2020 piece on the subject: The result is disinflationary.Īfter years of grinding through that slow-growth environment, transferring some of the debt from the private sector to the public sector, working off the oversupplied capacity, having higher and higher levels of populist politics among the population as a result of such a negative environment, and eventually turning towards fiscal stimulus- that’s when things eventually start to get inflationary in terms of broad money supply and prices. Broad money isn’t going up faster than usual, even as base money is. The decade after a developed market financial crisis (private debt liquidation) is a period of industrial capacity oversupply, commodity oversupply, financial deleveraging, and sluggish demand for things. However, expanding base money and recapitalizing the banking system doesn’t translate into inflation right away. ![]() This was the key chart from that May 2021 newsletter issue, and it remains relevant today:Īnd here’s a zoomed-in look at the unique policy response to these 19 financial crises, where the monetary base was expanded rapidly, unlike other periods in history: Both the primary cause of the inflation, and the response to that inflation, currently look more like the 1940s than the 1970s throughout developed markets. When people think of inflation, they are quick to think of the 1970s, but I’ve been using the 1940s as the closest historical analogue since before the inflation began, due to the conditions that were setting up for it. This was a topic I had covered extensively throughout 20. My May 2021 newsletter issue was called “ Fiscal-Driven Inflation “, where I discussed how the combination of fiscal and monetary policy that we were seeing at the time was similar to what occurred back in the 1940s wartime era. This newsletter issue analyzes policymakers’ current attempts to rein in price inflation via demand destruction, and why that approach is unlikely to work as well as they think. Nattakorn Maneerat/iStock via Getty Images ![]()
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