Source: official account: Xiake island wechat id:xiake_ island
Biden recently admitted that the White House is “trying to curb the impact of high inflation”, but it is unlikely to reduce the soaring energy and food prices in the short term, and consider “continuing to buy Russian oil at a price lower than the market”.
The “highest inflation in 40 years” in the United States has been listed by Biden as the “top domestic task” to be solved at present. U.S. Treasury Secretary Yellen also publicly “admitted his mistake” and said that he was wrong in his judgment that “upward inflation will not cause sustainability problems” last year, and the U.S. economy has been greatly impacted.
Since last March, the US inflation data has been gradually rising. In January this year, the US consumer price index (CPI) rose by 7.5% year-on-year, the largest increase in 40 years; In February, CPI rose by 7.9%, 8.5% in March and 8.3% in April, and remained at a high level.
The rise in CPI means that prices are getting higher and higher, and people are buying more and more expensive things. On May 31, Biden called together Treasury Secretary Yellen and Federal Reserve Chairman Powell to discuss how to solve the inflation problem.
Why did the United States fall into high inflation? After all, only by finding out the cause can we find the right remedy.
Generally speaking, the high growth of M2 is the key factor for prices to rise to inflation. The so-called m2, that is, the generalized money supply of a country or region, is composed of cash circulating outside the banking system plus demand deposits, time deposits, savings deposits, etc. the increase in M2 growth means that the money supply is loose. You can see the following picture——
Comparison between the growth rate of the Federal Reserve’s basic currency and M2 (Figure provided by the author)
As shown in the figure, after the outbreak of the U.S. epidemic in 2020, the government implemented a large-scale rescue, and a large amount of invalid monetary input led to a surge in U.S. M2 – which indicates that the incidence of hyperinflation in the future is very high.
In this sense, Yellen’s “mistake” may be that he clearly saw M2 soaring, but thought that “the probability of hyperinflation is low”; Seeing that the CPI has risen by more than 2%, she also believes that “this is temporary” because of supply factors.
Previously, in Yellen’s view, if the tariff imposed by trump on Chinese goods can be removed and the supply side barriers (such as the congestion of major U.S. ports) can be cleared, it will have a positive impact on U.S. prices, even more effective than the Federal Reserve’s interest rate hike and monetary policy tightening. Yellen made some efforts to this end, and also had a “quarrel” with Dai Qi, the US government trade representative. Yellen believes that 90% of the high tariffs imposed by trump on Chinese goods have become the consumption costs of the American people.
Yellen has a point. Trump’s imposition of tariffs on Chinese goods will certainly raise us prices; The “oil embargo” imposed by the United States and the West on Russia will certainly raise the energy prices of the world, including the United States; The sharp rise in energy and food prices will also lead to a rise in the prices of industrial products around the world, including the United States; In addition, the decline of labor force participation rate in the United States has led to “labor shortage” and pushed up the wage level – these are “non monetary factors” of high inflation in the United States.
Therefore, Yellen’s “confession” may be more meaningful in “carrying the pot for the White House”. After all, the president has lost a lot of public support because of price problems.
Moreover, in the current United States, political correctness has gone beyond economic common sense. The United States is neither willing nor able to do “non monetary means” that are beneficial to the American economy and the world economy, such as abolishing tariffs on China, ending the conflict between Russia and Ukraine, and stopping switching commodity supply chains.
What can we do? The only way left is for the Federal Reserve to play a one-man show. For example, keep raising interest rates.
Federal Reserve building (source: Xinhua News Agency)
Let the Federal Reserve alone block the rise in prices, the role is limited.
Why? Because price increases are “relative”. CPI growth is nothing more than year-on-year and month on month. Prices have risen this year. As long as they do not rise next year, the year-on-year CPI growth will return to zero next year. In other words, if this year’s “price increase factors” disappear next year, such as the tariff and oil prices to China do not continue to rise, or the US government stops effectively throwing money, even if the absolute value of prices does not fall, the CPI increase will disappear.
But the question is, have prices fallen? No, The year-on-year decline in prices is called deflation. It is an economic problem worse than inflation.
At the same time, relying on the Federal Reserve to curb prices alone will also suppress US economic growth, which is an obvious negative effect of monetary policy and also a concern of Biden, Powell and Yellen. The Fed’s emphasis on the return of monetary policy to “neutral” is actually weakening the market’s fear of substantial interest rate hikes – after all, the US GDP growth rate in the first quarter of this year was -1.5%, and there has been an economic recession.
Although the United States and even the world are paying attention to prices, the more essential problem is economic stagnation and rising prices, that is, stagflation. To control stagflation, it is necessary to find a balance between economic growth and price stability, which is more important, and what is the order, which must be carefully considered by American managers.
No matter how the United States responds, one thing is certain: the United States is making serious mistakes. It is based on the so-called “political correctness” and ignores the economic cost. The real victims are ordinary people.
After the outbreak, the base currency of the United States soared. The reason is that the White House “flew a helicopter to throw money”. Apart from maintaining U.S. household spending, fiscal expenditure basically had no economic benefits. In this context, the M2 inflation in the United States is a currency foam, the stock price inflation is a stock market foam, and the price inflation is a consumption foam. The current hyperinflation in the United States is the result of the government’s “ineffective spending” during the epidemic, but
We should not only look at the monetary factors of rising prices, but also ignore many non monetary factors in inflation.
The U.S. government certainly hopes that the public will only pay attention to the excess currency factor behind the rise in prices. As a result, non monetary factors such as the U.S. trade war with China, the conflict between Russia and Ukraine, and Wall Street financial giants’ speculation in commodity futures are easy to be ignored. But these are the key factors. Just imagine, if the American public, like Yellen in the past, focused on the unreasonable high tariffs imposed by the United States on China, the disruption of the supply chain by the United States to encircle and suppress China, and the Russian Ukrainian conflict and the subsequent soaring global food and energy prices, what kind of pressure would the U.S. government face? At that time, it is not only Yellen who should “admit his mistake”?
Article / China Economic Weekly niuwenxin
Edit / Yunge, ayama