Economists John Greenwood and Steve H. Hanke put down a marker in their op-ed in the Wall Street Journal. Inflation will be transitory but it won’t be transitory transitory:
Let’s take a look at the U.S. bathtub. During the early months of the Covid-19 pandemic, the faucet was wide open. Between December 2019 and August 2021, the U.S. money supply, measured by M2, grew by $5.5 trillion, a stunning 35.7% increase in only a year and a half, driven primarily by the Fed’s purchases of Treasurys and mortgage-backed securities. In light of anticipated Federal Reserve tapering, we estimate that by the end of 2024 the money supply will grow another $5.1 trillion.
Out of the total $10.6 trillion in new money, real GDP growth will drain roughly $1.4 trillion. Another $1 trillion will flow down the money demand drain. Since the amount of money flowing into the bathtub far exceeds the two outflows, the excess money in the tub—around $8.2 trillion—will hit the inflation overflow drain.
The huge monetary expansion—$5.5 trillion already in the bathtub—is starting to reach the overflow. Persistent, not transitory, inflation will be with us for the next two to three years.
The rest of the op-ed is devoted to their bathtub metaphor for money and inflation. Money pour in through the faucet and drains out via economic growth, money that the public wishes to hold relative to its income, and inflation.
If they’re correct, what’s the right policy response? And an additional extra credit question: can the president’s party hold onto their razor-thin majorities in Congress with the right policy response?