Inflation Is Killing the Working Class

CommentaryInflation “is destroying working folks’ pocketbooks and devaluing the wages they earn and the root cause … is way too much government spending, too many social programs … and vastly too much money creation by the Federal Reserve,” Larry Kudlow, former director of the U.S. National Economic Council, said on Feb. 14. During the pandemic, the U.S. Federal Reserve (Fed) lowered interest rates, bought bonds and mortgage-backed securities (MBS), and increased the money supply by 40 percent, driving the current inflation rate to its highest level in decades. The last time the United States faced runaway inflation, which was in the late 1970s, the then-incoming Fed Chairman Paul Volcker capped the money supply and was able to bring inflation to heel by 1983. However, the current Fed Chairman Jerome Powell believes that there is no connection between the money supply and inflation. Powell’s position flies in the face of the teachings of Nobel Prize winner Milton Friedman and most mainstream economists who caution that the government should not print too much money for fear of causing inflation. Shortly after the pandemic hit the United States, the Fed cut interest rates and began buying bonds to increase the money supply. On March 3, 2020, the Federal Open Market Committee (FOMC) cut the key interest rate by 50 basis points to 1.25 percent. Less than two weeks later, on March 15, FOMC cut the key interest rate by an additional 100 basis points and resumed purchases of bonds totaling $700 billion. Then the next day, the Fed announced it would decrease the target range for key interest rates to zero. The Fed used quantitative easing to buy up large quantities of bonds and mortgage-backed securities (MBS), marking the first time the Fed had enacted its MBS buying program since the 2007-2008 global financial crisis. In the early period of the pandemic, the Fed released plans to purchase a minimum of $500 billion of Treasurys and $200 billion of government-guaranteed MBS over the coming months. On March 23, 2020, the Fed notified the public that the purchases would continue. Normally, the Fed uses quantitative easing to maintain smooth markets by providing liquidity. However, during the pandemic, it was buying up bonds and MBS to support the economy. In June 2020, the Fed announced a change to its purchasing program: $80 billion a month in Treasurys and $40 billion in residential and commercial mortgage-backed securities. The buying continued until November 2021, when the Fed reported that it would begin reducing its purchases. On Dec. 15, 2021, the Fed announced that it would further decrease its monthly securities purchases to $20 billion in Treasurys and $10 billion in MBS. Federal Reserve Board Chairman Jerome Powell speaks during his renominations hearing of the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill in Washington on Jan. 11, 2022. (Brendan Smialowski/Pool/AFP via Getty Images) Between 2020 and the present, the Fed bought nearly $5 trillion in mortgage-backed securities (MBS) and government bonds. In addition to buying securities, the Fed offered 90-day loans to 24 large financial institutions through the Primary Dealer Credit Facility (PDCF). The Fed also lent money to banks through the Money Market Mutual Fund Liquidity Facility (MMLF). Two new facilities were also created to provide loans to corporations. The Primary Market Corporate Credit Facility (PMCCF), established on March 23, 2020, allowed the Fed to purchase new bond issues and make direct loans to corporations. The other program, the Secondary Market Corporate Credit Facility (SMCCF), allowed the Fed to purchase existing corporate bonds in addition to certain exchange-traded funds. The combined actions of the Fed drove the M2, the broadest measure of the money supply, from $15.5 trillion in 2020 to $21.6 trillion in 2022. As of April 2022, the Fed holds a record $8.5 trillion worth of assets, largely composed of government bonds and mortgage-backed securities. This is more than double the $4.24 trillion portfolio the Fed held on March 18, 2020. At the March 15–16 meeting this year, the Fed decided that interest rates would be increased by a quarter of a percentage point, and it was suggested that interest rates would be raised again later this year. The Fed will also begin selling bonds at a rate of $95 billion per month to decrease the money supply. Some economists believe that these anti-inflationary steps taken by the Fed are too little, too late, and that inflation will not be brought under control for years to come. During the pandemic, the signaling from politicians and media was so constant and frightening that many Americans sat on their cash and deposited their stimulus checks into their savings accounts. As a result, Americans increased their savings by $2.7 trillion. A professor of applied economics at Johns Hopkins University, Steve Hanke, said that once the pandemic is over, people will

Inflation Is Killing the Working Class

Commentary

Inflation “is destroying working folks’ pocketbooks and devaluing the wages they earn and the root cause … is way too much government spending, too many social programs … and vastly too much money creation by the Federal Reserve,” Larry Kudlow, former director of the U.S. National Economic Council, said on Feb. 14.

During the pandemic, the U.S. Federal Reserve (Fed) lowered interest rates, bought bonds and mortgage-backed securities (MBS), and increased the money supply by 40 percent, driving the current inflation rate to its highest level in decades.

The last time the United States faced runaway inflation, which was in the late 1970s, the then-incoming Fed Chairman Paul Volcker capped the money supply and was able to bring inflation to heel by 1983. However, the current Fed Chairman Jerome Powell believes that there is no connection between the money supply and inflation. Powell’s position flies in the face of the teachings of Nobel Prize winner Milton Friedman and most mainstream economists who caution that the government should not print too much money for fear of causing inflation.

Shortly after the pandemic hit the United States, the Fed cut interest rates and began buying bonds to increase the money supply. On March 3, 2020, the Federal Open Market Committee (FOMC) cut the key interest rate by 50 basis points to 1.25 percent. Less than two weeks later, on March 15, FOMC cut the key interest rate by an additional 100 basis points and resumed purchases of bonds totaling $700 billion. Then the next day, the Fed announced it would decrease the target range for key interest rates to zero.

The Fed used quantitative easing to buy up large quantities of bonds and mortgage-backed securities (MBS), marking the first time the Fed had enacted its MBS buying program since the 2007-2008 global financial crisis. In the early period of the pandemic, the Fed released plans to purchase a minimum of $500 billion of Treasurys and $200 billion of government-guaranteed MBS over the coming months. On March 23, 2020, the Fed notified the public that the purchases would continue.

Normally, the Fed uses quantitative easing to maintain smooth markets by providing liquidity. However, during the pandemic, it was buying up bonds and MBS to support the economy. In June 2020, the Fed announced a change to its purchasing program: $80 billion a month in Treasurys and $40 billion in residential and commercial mortgage-backed securities.

The buying continued until November 2021, when the Fed reported that it would begin reducing its purchases. On Dec. 15, 2021, the Fed announced that it would further decrease its monthly securities purchases to $20 billion in Treasurys and $10 billion in MBS.

Jerome Powell
Federal Reserve Board Chairman Jerome Powell speaks during his renominations hearing of the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill in Washington on Jan. 11, 2022. (Brendan Smialowski/Pool/AFP via Getty Images)

Between 2020 and the present, the Fed bought nearly $5 trillion in mortgage-backed securities (MBS) and government bonds.

In addition to buying securities, the Fed offered 90-day loans to 24 large financial institutions through the Primary Dealer Credit Facility (PDCF). The Fed also lent money to banks through the Money Market Mutual Fund Liquidity Facility (MMLF).

Two new facilities were also created to provide loans to corporations. The Primary Market Corporate Credit Facility (PMCCF), established on March 23, 2020, allowed the Fed to purchase new bond issues and make direct loans to corporations. The other program, the Secondary Market Corporate Credit Facility (SMCCF), allowed the Fed to purchase existing corporate bonds in addition to certain exchange-traded funds.

The combined actions of the Fed drove the M2, the broadest measure of the money supply, from $15.5 trillion in 2020 to $21.6 trillion in 2022.

As of April 2022, the Fed holds a record $8.5 trillion worth of assets, largely composed of government bonds and mortgage-backed securities. This is more than double the $4.24 trillion portfolio the Fed held on March 18, 2020.

At the March 15–16 meeting this year, the Fed decided that interest rates would be increased by a quarter of a percentage point, and it was suggested that interest rates would be raised again later this year. The Fed will also begin selling bonds at a rate of $95 billion per month to decrease the money supply.

Some economists believe that these anti-inflationary steps taken by the Fed are too little, too late, and that inflation will not be brought under control for years to come.

During the pandemic, the signaling from politicians and media was so constant and frightening that many Americans sat on their cash and deposited their stimulus checks into their savings accounts. As a result, Americans increased their savings by $2.7 trillion.

A professor of applied economics at Johns Hopkins University, Steve Hanke, said that once the pandemic is over, people will begin spending their savings, and this will cause the inflation to linger for years to come. With the money supply growing at 13 percent per year, Hanke estimates that inflation will remain above 6 percent for the next two years. This is consistent with a recent survey by the Fed, which found that the public expects 2023 inflation to hit 6.6 percent.

Other estimates, such as from the London School of Economics, predict a lower number than Hanke, although their prediction of 3.9 percent is still relatively high for the United States. It seems that most forecasters agree that inflation will remain high for at least the next two years.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.


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Antonio Graceffo, Ph.D., has spent more than 20 years in Asia. He is a graduate of the Shanghai University of Sport and holds a China-MBA from Shanghai Jiaotong University. Graceffo works as an economics professor and China economic analyst, writing for various international media. Some of his books on China include "Beyond the Belt and Road: China’s Global Economic Expansion" and "A Short Course on the Chinese Economy."

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