- - Friday, February 11, 2022

For several months, inflation has been a persistent problem in the U.S. economy. According to the latest Consumer Price Index Report from the Bureau of Labor Statistics, inflation increased 0.6% in January. Even more concerning, the annual inflation rate has now reached 7.5%, the highest since February 1982.

Over the past 12 months, inflation has infected almost every sector of the U.S. economy. For instance, energy prices are up 27%; new vehicles are up 12%; used cars and trucks have skyrocketed by 40%; apparel has increased by 5%; transportation services have risen by 5.6%; and shelter has increased by 4.4%.

Although some economists will claim that the present bout of inflation is inexorably tied to the ongoing fallout from the global pandemic and the domino effect it has had on supply chains and the labor market, a much simpler explanation for the 40-year high in inflation comes to mind: Too much money printing.

The classic definition of inflation is too many dollars chasing too few goods and services. We know that the availability of goods and services has been negatively impacted by pandemic lockdowns, the supply-chain crisis, the global computer chip shortage, and several other factors.

To a certain degree, given that we live in a globalized economy, some of these factors are beyond our control.

However, we also must face the fact that during the pandemic, the federal government has embarked upon an unprecedented money-printing binge, that is arguably the primary force behind the ever-increasing inflation that we are now dealing with.

Consider. Over the past two years, the federal government has allocated nearly $4 trillion for COVID-19 relief funding. Yet, that is just part of the problem.

The real issue at the heart of our inflation challenge is the rapid increase of the Federal Reserve’s balance sheet over the past decade.

In early 2008, before the housing crisis, the Fed’s balance sheet totaled approximately $880 billion. To avert a “global financial meltdown,” the Fed more than doubled its balance sheet by late 2008. Then, the Fed slowly but surely added to the balance sheet, until it reached a whopping $4 trillion by 2014.

From 2014 to early 2020, the Fed’s balance sheet remained stable and even began decreasing in 2019. Then, the pandemic changed everything.

From 2020 to today, the Fed’s balance sheet has ballooned from about $3.8 trillion to almost $9 trillion. Making matters worse, the Federal Reserve has shoveled nearly $6 trillion into the money supply over the same period.

In early 2020, the M2 Money Supply (the total number of dollars in circulation) stood at $15 trillion. Nearly two years later, it has increased to $21.6 trillion.

Put another way, over the past two years, the government has handicapped the economy with lockdowns, anti-work programs, and generous welfare payments that have stifled production of goods and services while pumping more than $6 trillion of new money into an economy operating at partial speed.

This makes little sense to those of us who believe in supply and demand, but it makes perfect sense for those who believe in modern monetary theory.

In short, modern monetary theory (MMT) posits that countries like the United States, which controls their own fiat currency, can print as much money as they want, regardless of debt and deficits. Further, MMT proponents claim that inflation can be controlled by taxation.

In a nutshell, MMT advocates, such as Sen. Bernie Sanders (I-VT), support printing huge amounts of money so the federal government can spend trillions on climate change, universal health care, “free” college, etc.

Of course, they fail to recognize that printing enormous amounts of money devalue every existing dollar, which is the cause of inflation in the first place.

Despite this fundamental flaw, MMT has gained credence among financiers, politicians, and elites, who dream of using MMT to pursue their far-flung fantasies.

Before MMT gains more momentum, we the people must make it clear as day that we reject the premise of more money printing to solve our problems. After all, too much money printing is the reason we are in this inflation mess.

  • Chris Talgo (ctalgo@heartland.org) is senior editor at The Heartland Institute.

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