Dear Reader,
Like an evil penny that returneth… a recurring migraine… or a fresh visit from a dreaded mother-in-law…
The United States economy cannot shake inflation loose.
The November inflation data has come issuing. Here USA Today gives the particulars:
- Inflation is moving in the wrong direction.
- U.S. inflation picked up for a second straight month in November on a rise in food and gasoline prices, underscoring that the final stretch of the Federal Reserve’s two-year battle against sharply rising prices has become more challenging.
- Consumer prices overall increased 2.7% from a year ago, up from 2.6% in October, according to the Labor Department’s consumer price index, a popular measure of goods and services costs. That’s the second increase following six straight declines…
Thus the Federal Reserve cannot declare victory over its formidable inflation foe.
Inflation Is Like Rocky Balboa
They have knocked it to the canvas, repeatedly.
Yet inflation has beaten the referee’s count on each occasion. It has been dazed. It has been wobbled.
Yet inflation maintains the vertical… and proceeds in defiance.
Thus it follows the example of Mr. Rocky Balboa.
It has even won the past two rounds — after losing the prior six.
The Federal Reserve is nonetheless confident it will win the bout on points.
So too are ringside spectators.
The market presently gives 94.9% odds that Mr. Powell and mates will trim rates 25 basis points on Dec. 18th.
The Federal Reserve does not like to disappoint market expectations.
It will therefore satisfy them with the 25-basis point trimming.
And so inflation will have its reprieve. It may recapture its wind.
Interest Rates Alone Don’t Control Inflation
Yet will the bout itself determine inflation’s fate? Not necessarily, argues macroeconomist Peter Schiff.
He says you must look instead to the money supply:
- Money supply… helps show how tight or loose current monetary conditions are regardless of what the Fed is doing with interest rates. Even if the Fed is tight, if money supply is increasing, it has an inflationary effect.
Is money supply increasing? The question is easier asked than answered.
There is, after all, not just money supply. There are money supplies.
Do not concern yourself with the particulars.
Yet you have the M0 money supply. You have the M1 money supply. You have the M2 and M3 money supplies.
You have the M4 money supply.
That you do not have the money supply talks volumes. Volumes — that is — about the byzantine wizardry of modern monetary economics.
Yet I let it pass for now.
The Money Supply Metric That Matters?
Here is a money supply metric in which Mr. Schiff places store:
- One key metric… is the “Wenzel” 13-week annualized money supply figure. It was made popular by the late Robert Wenzel who tracked the metric weekly as an indicator for where the economy might be headed.
What does the “Wenzel” 13-week annualized money supply figure presently reveal?
The answer is money supply expansion:
- Growth has been accelerating for 15 straight weeks and has hit the highest level in at least 60 weeks.
Yet what if we mix inflation, money supply and the federal funds rate (the Federal Reserve’s target rate) together?
What does it imply for the future? The answer is an inflationary scene:
- In 1970 inflation worked with ~2 year lag compared to money supply. Given this, it is possible that another bout of inflation is lurking just under the surface considering the massive spikes in 2020 and 2021. The Fed has already started cutting rates, which will add fuel to the fire.
Here is the evidence — the graphic evidence:
Source: Schiff Gold
As Goes the Money Supply, so Goes the Stock Market
And if you believe the stock market has leaped to record heights independent of money supply… Mr. Schiff says have another guess:
- Money supply can be a leading indicator and help explain the action in the stock market. Money supply fell the entire year of 2022, bottomed in early 2023 (and) has been rising pretty steadily since. This has definitely helped fuel the stock market to all-time highs.
Meantime: we must consider “financial conditions.”
Generative AI furnishes us with this definition of financial conditions:
- Financial conditions refer to the cost and availability of financing for the real economy. It’s a complex economic concept that’s made up of many factors, including:
- Interest rates, inflation, employment, credit availability, market liquidity, asset prices, exchange rates, and commodity prices.
The stock market ebbs and flows with shifting financial conditions… as the tide ebbs and flows with the moon’s shifting humors.
Loose and Lax as a Harlot’s Virtue
Financial conditions are presently as loose and lax as a harlot’s virtue — if not looser and laxer.
“They’re the loosest they’ve been in years by some gauges,” Reuters informs us. More:
- BNP Paribas economists note that… what matters for the real economy is broader financial conditions. And these conditions have eased substantially over the past year.
Is it a wonder — then — that the stock market has thrilled as financial conditions have eased?
It is no wonder whatsoever. And I hazard lax financial conditions will keep inflation up and going.
I hesitate to cite the International Monetary Fund. I do not believe in it.
Yet here I authorize an exception:
- Financial conditions… have eased notably in the United States and euro area in recent quarters. This easing has occurred despite continued monetary policy tightening by the Federal Reserve and ECB…
- The recent easing creates a challenge for central banks in their efforts to get inflation back to their 2 percent targets. Historically, tighter monetary policy has been transmitted to the real economy, and subsequently to inflation, through tighter financial conditions…
- the recent easing may complicate the fight against inflation…
The Fed Helped Let the Inflationary Genie Out of the Bottle
In summary: expanding money supply and easing financial conditions will push inflation along.
For years the Federal Reserve labored in vain to work 2% inflation.
In the post-pandemic years it got it — and lots more.
The Federal Reserve may now labor in vain to depress inflation to 2%.
Partnering with the United States Treasury, it helped allow the genie out of its bottle.
And it cannot get it back in.
Regards,
Brian Maher
for Freedom Financial News
