Originally Posted by jyl
If you want to get into the weeds, it’s not just the supply of money (M), it’s the velocity of money (V). In a recession, people and businesses get scared, stop spending, dollars sit hoarded in bank accounts instead of moving through the system buying things. So you can increase M in a recession without creating inflation, because V is collapsing . You’re actually trying to keep M * V stable, to avoid deflation. After the threat passes, and V odd picking up again, you reduce M.
As a practical matter, though, what really happened is that in a few weeks, 20% of Americans lost their jobs or were about to, more than 20% of American businesses were starting at collapse, the US Treasury market was about to collapse, the same was happening around the world, and inflation was the least of anyone’s worries.
The US government threw $4TR at the real economy to keep people eating, housed, in business, not doing a Grapes of Wrath Depression remake. Remember that a large percent of Americans don’t have even two months of expenses in savings, and that a large percent of American businesses have large amounts of debt that has to be rolled over every year or more often.
The Federal Reserve threw $4TR at the financial system to keep it from blowing up. Remember that funds, companies don’t keep that much cash around, when they need cash they sell Treasuries or similar safe securities, and when everyone in the world is trying to sell and no-one is trying to buy, even US Treasuries go no-bid, prices plunge in big gap falls, and falls in prices make more funds and companies desperate if not insolvent, triggers massive margin calls, and the whole thing goes into a death spiral.
Almost every rich country - US, Europe, Canada, etc - that had the means to do the same did so. In the poorest countries, people went hungry. China and much of Asia resorted to intense lockdowns (what we called a lockdown in the US was amateur hour in comparison). The US and other Western countries are rich in money but not in social control, so we went the money route.
It worked. There wasn’t a global Great Depression, the financial system survived, most companies and businesses survived, etc. Maybe the dose given was too high, who knows, but the patient lives.
So now we have to deal with the after effects (over dose?), one of which is inflation. M went way up, V recovered, now M has to be pulled down.
The US govt is not really able to take back money it has given out, and even though the federal tap has been mostly shut off, a bunch of that money went to the states who are still handing it out. Things like China locking down and its effect on the supply chain, Russia invading Ukraine, have complicated things. Politics gets involved - it was involved in pouring the money in (remember Trump wanting his signature on the initial stimmy checks, to help with his re-election? and then Biden wanted his share of credit too?) as well. But the pandemic-driven excess in household bank amounts is being drawn down, it will probably be gone by mid-2023.
The Federal Reserve has a lot more ability to take back money. Driving the Fed funds rate from zero to 4% in less than a year pulls a lot of money out - house prices falling, bond and stock prices falling (something like $10 TR in stock market value lost in 2022, and a much larger amount in bond market value), companies less able to borrow, stupid crap like crypto and SPACs and NFTs imploding, now companies starting to layoff and freeze projects - and about $80BN/mo (about $1TR/yr rate) is also being pulled out via balance sheet run-off.
At this point, I’m not sure the money injections in 2020/21 are the most stubborn driver of inflation. They certainly drove house prices and rents up, but that is reversing quickly. The stubborn part now is labor shortages and rising wages. Some of that is people retiring early because their stocks went up or to trade crypto, but there’s other things going on.
I’m rambling, sorry, and phone battery about to die. Pick this up tmrw.
Edited: typos
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