> “I think I was wrong then about the path that inflation would take,” she told CNN’s Wolf Blitzer. “There have been unanticipated and large shocks that have boosted energy and food prices, and supply bottlenecks that have affected our economy badly that I ... at the time, didn’t fully understand.”
We put a bunch of money into the economy as a response to Covid. More money means prices go up. But we put in a fixed amount of money, so there should have been a fixed amount of inflation.
The real explanation here is that there is less stuff! International trade is a hot mess right now and things are just literally more expensive because we have become materially poorer.
We did not put a "fixed amount of money". Money is created by both the Fed and by commercial banks. Whenever banks advance new loans, they create money out of thin air. Whenever they refuse a borrower to renew a loan, they destroy money.
When the Fed pumps money in the system (by QE), the banks act as a multiplier. But the multiplier is not fixed. The banks extend loans, businesses load up on debt, then they swim in cash, they do stock buybacks, stock go through the roof, people who own stocks feel they get richer (at least on paper), they consume more, businesses profit, then they want to expand, they go to banks, and the banks seeing how profitable the businesses are are happy to extend new loans, which is the same as to create new money.
It's a "virtuous cycle", depending on your definition of "virtuous".
A different way to look at it is that the economy overheats. The cycle of money creation has gone out of hand, and the Fed has to apply the brakes.
Yellen knows very well all these things. She was the head of the Fed, she is supremely smart. She's just lying through her teeth saying she "didn't fully understand". Of course a statement about her own state of mind is not a falsifiable statement, so she has the luxury to say whatever she wants. But she knows perfectly well how the economy works, it's absolutely impossible she didn't anticipate the results of pumping trillions and trillions of dollars in the economy.
I think you are being a little over confident in your understanding of what is causing the inflation. If it were as simple as pumping money into the economy, we wouldn't be seeing inflation in most every country, everywhere. And no, every country did not pump a lot of cash into their economy.
This chart of M2 looks like the amount of money pumped into the economy was anything but a fixed amount. Unless, if you're talking about the first derivate of M2, then you could argue number is fixed.
That's a great link. If you edit the graph and replace it with "Percent Change from Year Ago", you see the 2008 spike and recovery clearly, and the truly enormous spike starting at 2020. I'm surprised to see ~5% growth since Volker. That is higher than I'd expect.
But if you add Real GDP to that chart, you can see the 2020 contraction was much larger than 2008, so the intervention was at least arguable.
> Before May 2020, M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000) less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market funds (MMFs) less IRA and Keogh balances at MMFs.
> Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing savings deposits (before May 2020), small-denomination time deposits, and retail MMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.
> For more information on the H.6 release changes and the regulatory amendment that led to the creation of the other liquid deposits component and its inclusion in the M1 monetary aggregate, see the H.6 announcements and Technical Q&As posted on December 17, 2020.
Source for the additional information is the link in your post.
Oh. So the discontinuity is an artifact of the change in the series.
Once the discontinuity ages out (June 2021), M2 is still running 13% over a year prior. That's historically high, but not so much higher than the 10% back in 2003, 2008, and 2012.
Sure. The government injected a bunch of money, but then banks took advantage of low interest rates and created money at a faster clip than the fed anticipated.
The question is why they kept rates so low for so long, and the answer provided here is they didn't plan for a trade retraction.
We put a bunch of money into the economy as a response to Covid. More money means prices go up. But we put in a fixed amount of money, so there should have been a fixed amount of inflation.
The real explanation here is that there is less stuff! International trade is a hot mess right now and things are just literally more expensive because we have become materially poorer.