by Lance Roberts, Clarity Financial
“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
– Milton Friedman
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Currently, there is no argument money supply has exploded without a corresponding increase in economic output. If there were, bank loans and monetary velocity would be on the rise. Unfortunately, such isn’t the case currently.
Furthermore, the weakness of the U.S. dollar contributes to the inflationary push in the economy as it increases the costs of imported goods.
However, these forces are why the current “inflationary surge” will become deflationary by the end of the year. Moreover, as noted above, this deflationary surge combined with the “Fed taper” is “dollar positive.”
Currently, wages are lagging higher costs amid a weaker dollar (purchasing power). Furthermore, as the previous stimulus leaves the system, purchasing power will fade. As such occurs, economic growth, import prices, and inflation will decline as the dollar tends to strengthen.
Unfortunately, for the Fed, they are really in a tough spot. As discussed previously, the Fed should be using the $120 billion in monthly QE to start hiking rates to prepare for the next recession slowly. But, instead, they will kick the “policy can” further down the road. The longer they wait, the harder it will be to pull off normalization without risking significant market volatility and reversing the economic recovery.
Of course, history already shows such is what will happen.
There have been ZERO times in history when the Fed started a rate hiking campaign that did not lead to a negative outcome.
We suggest this time won’t be any different.
