In a Wall Street Journal op-ed former Federal Reserve governor Kevin Warsh lays the blame for inflation soundly on the Federal Reserve:
f price stability is squandered, financial stability is put at risk. If financial stability is lost, the economy is imperiled and the social contract is threatened.
During the past several quarters, U.S. inflation has surged—now running about triple the Federal Reserve’s 2% target. The surge in prices is unlikely to reverse on its own. The longer that prices are unstable, the greater the challenge to the conduct of macroeconomic policy. The last thing the country needs is its third major economic upheaval in a decade and a half.
[…]
Inflation is a choice. It’s a choice for which the Fed is chiefly responsible. The risk of an inflationary spiral arises when policy makers first dismiss the problem and then cast blame elsewhere. Inflation becomes embedded in the price-formation process when the central bank acts belatedly or with insufficient conviction. To date, the Fed has acted as an enabler.
The sure sign of a problem: when a president gives voice to the scourge of inflation—and takes executive action—well before the central bank acknowledges the severity of the situation.
“Supply-chain bottlenecks†is the popularized rationalization for the surge in prices. But the supply-chain story sheds more shade than light. Consumer prices are higher because prices are rising at the points of production, assembly and transportation. This is a description of the state of affairs, not its source. The Fed’s inertia in withdrawing extraordinary monetary policy—amid full employment—is the proximate cause of surging prices.
I have some reservations about these assertions:
When monetary policy is too tight, it slows aggregate demand. When monetary policy is too loose, it damages aggregate supply. Extraordinarily aggressive monetary policy, namely quantitative easing, discourages investments in real assets like capital equipment relative to financial assets such as stocks. That’s why nonresidential capital investment in the real economy—things like port modernization—is running 7% below the pre-pandemic trend and 25% below trend since the advent of QE. A more exuberant stock market and a less resilient real economy are both consequences of the Fed’s extant policy regime.
I agree with the first claim (monetary policy that is too tight slows aggregate demand), am uncertain about the second (monetary policy that is too loose slows aggregate product), and agree 100% with the third (QE encourages investment in financial assets at the expense of real assets). For me the question is why is the Fed doing what it is? Or, more precisely, not doing what it is not doing? Overly politicized? Trying rather desperately to preserve Fed independence? Priorities in the wrong place?
From the quote:
When monetary policy is too tight, it slows aggregate demand.
An economy is driven by supply, specifically production. Tight money decreases available capital for investment, and simply increasing consumer demand does not increase available for investment.
(If increasing demand increases supply, the ancient Egyptians would have been using iPhones, but demand for a product requires a product to demand. So, demand presupposes an available supply.)
With the Modern Monetary System (MMS), any money not used to increase production capacity must flow into financial type assets, domestic or foreign.
(I dislike using the word “supply” because it wasily devolves into a “supply-side” debate, and more importantly, I mean production.)
Finally, inflation is seriously misunderstood. In one aspect, it is simply a monetary phenomenon, but the MMS must expand for the economy to grow. As long as increasing the money supply results in increased productive capacity with little malinvestment, there will be little price inflation.
The Fed and/or government debt is largely to blame for malinvestment, and malinvestment often results in recession and/or inflation.