Matthew Miner's Basic-ish BlogMatthew Miner's Blog

Sometimes I might say something

Nobody likes inflation, but it is occurring. As of February 2022, the US has seen 7.5% inflation over the past year, as judged by the Bureau of Labor Statistics's Consumer Price Index. This is the highest it's been since the early 1980s recession. This means that the average consumer is spending 7.5% more money overall for the same things now than they were this time last year. Not everything has gone up 7.5%—some things like dairy, medical care, alcohol, housing, mechanics, and air fare haven't gone up as much as average. But some things like vehicles, gas, and meat were hit especially hard and went up 12–40%.

It's easy to be upset about high inflation, and rightfully so, but why is inflation high? What causes inflation? Well, I see three main factors that have all contributed to the current inflation:

#1: Government Spending

Probably the primary reason for the current inflation is government spending.

In 2018, the US federal government spent $4.10 trillion.

In 2019, the US federal government spent $4.45 trillion.

In 2020, the US federal government spent $6.55 trillion.

2021 isn't looking to be much better, with the Congressional Budget Office expecting spending to equal $6.85 trillion.

Source

One of the main things driving this drastic increase in spending is the recent stimulus packages. Trump signed the CARES Act, spending $2.2 trillion, and the Consolidated Appropriations Act, 2021, spending $2.3 trillion. Biden then followed in Trump's footsteps by signing the American Rescue Plan Act of 2021, spending another $1.9 trillion in stimulus money. The Infrastructure Investment and Jobs Act also added another $550 billion in spending. Biden also tried hard to pass the Build Back Better Act to spend an addition $3.5 trillion, but thankfully it failed to pass 48-52.

The government spends trillions of dollars, but it isn't raising taxes on Americans the tens of thousands of dollars per person that would be needed to pay for the spending. How it makes this money through loans and bonds is complicated, but the end result is still that it's making more dollars exist than there was before. It's essentially printing money out of thin air.

Here's a chart of broad monetary aggregates. There was a very constant 6–7% annual increase in money from 2000 to 2020, but when the pandemic stimulus spending started, it suddenly jumps 17.5% in 4 months and then continues going up at double the old rate afterwards. This is definitely the most unprecedented liberal money printing to ever happen. As of February 2022, 30% of all the US's monetary aggregates was created within the last two years.

As more dollars exist, dollars in general become worth less each. Historically, this is the main cause of extremely high inflation such as was seen in the Weimar Republic, Zimbabwe, and Venezuela. Printing more money doesn't create value; it just reallocates it and changes the numbers. As the government has created stimulus money, it hasn't created value. It's just taken it from the existing dollars and given it to the recipients of the stimulus money it's been making.

The government can help prevent this in the future by spending less, but it can't undo the damage that the stimulus packages has already done to the value of the dollar.

#2: Supply Chains

This isn't a catch-all answer, but for some of the most inflated goods, the main culprit is supply chain issues. New car supply has been hamstrung by chip shortages in Taiwan. Since demand has stayed the same, prices jumped. The inability to get enough new cars has also caused demand to shift to used cars, causing that price to skyrocket. New cars prices are up 12%, and used car prices have risen by 40%! This is almost entirely because they can't make enough computer chips for the new cars. Shells of cars without the chips are just sitting built, waiting for those last components to finally arrive to finish them.

Gas prices are mainly caused by increased crude prices due to low production. As the pandemic hit, people across the globe began to quarantine and stay at home. As far fewer people were driving and buying gas, oil producing began pumping less oil in accord. Now that the pandemic is ending and people have begun driving more again, oil producers have struggled to ramp production up to pre-pandemic levels.

Transportation and labor shortages also caused beef prices to raise 20% over last year.

These problems caused some of the most drastic increases, but there is little that can be done to resolve these but to wait for businesses to adjust.

#3: Low Interest Rates

By requiring banks to keep money in reserve with the Federal Reserve and by changing the interest rates banks can charge for loans for such reserves, the government can largely control the overall economy's interest rates. Currently, the Effective Federal Funds Rate is basically zero. Except for a couple years from 2017 to 2020, it's basically stayed at 0% since 2009 when Bernanke dropped it to try to help stimulate the economy after the 2008 financial crisis.

The low interest rate has been intentional. A low interest rate means that it's a waste of money to leave it sitting in your bank account. An interest rate of 0% means that it's free to borrow money. So when interest rates are low, people go out and spend money. It stimulates the economy. You can't make money by leaving it in the bank, but you might be able to by opening a new business. It affects the world.

This sounds good, which is why the government has been so insistent on this policy over the last 1½ decades, but there is a downside. As people keep spending, spending, spending and borrowing more and more money, it begins to create a bubble. No one wants to hold onto money, but they keep borrowing and creating more money. Over a sustained period of time, this creates inflation as this borrowed money keeps getting injected into the economy and no one is taking money out of the economy and into savings. Again, money is becoming more common and thus worth less.

This is the main lever the government has. It can raise interest rates whenever it wants and put a stop to all this capitalist economic activity. It just doesn't want to do this because everyone likes a healthy economy and for the stock market to go up and for people to buy things and start businesses and hire people. It's one of our modern government's main goals.

But raising the interest rates is something the government has to do eventually. The longer it puts it off, the worse inflation will get, and the bigger this bubble will get, and the more devastating it will be when everything starts to stop. Low interest rates is one of the big reasons for inflation being so high. No one wants to be the one responsible for ruining the fun, but if someone doesn't reign in inflation rates soon, the fun will be ruined even worse anyway. The only choice the government has to make now is between bad and worse.

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