The Dollar INFLATION? Part 1
Hello,Traders!
The fears of inflation are now the reality, with the official FED number showing that inflation went from 1.6% in 2020 to 4.2% in April 2021, which means that the situation "on the ground" is even worse. Even just by looking at the charts of lumber, copper , and other commodities , while finding out that all the cars in your local dealership are sold out a year ahead, and the car prices are up, with the FED and the Treasury competing for the number of zeros on their official operating papers, the thoughts of «shortages» and «inflation» are naturally creeping into your head,followed by the question of "how it all came to it?" And while the Covid-19 and the lockdowns are the obvious culprits, the details are interesting. So let's dive into the mess of the Covid-19 consequences to find out.
Generally, Inflation can be caused by any of the two components: excess money supply, directed towards consumption, as opposed to investments, or goods supply shortage, with the unchanged money supply.
In 2021 we seem to have both, but the details are quite peculiar.
Let's deal with the excess money supply bit first, as it is kinda obvious: In march of 2020, the FED added 2.3 Trillion dollars to the direct asset purchases program, while expanding indirect liquidity by relaxing bank reserves standards, and relieving other regulations of the money markets to facilitate lending and prevent broad money contraction. Most of that money, however, went into the financial assets, inflating the asset prices, which can be seen by looking at the prices of Gold , Bitcoin , S&P500 , and other key benchmarks.
U.S. Fiscal Policy bit, however,was more directly relevant to the consumer goods inflation .
Throughout March and April 2020, the U.S. government passed three main relief packages and one supplemental package, totaling nearly $2.8 trillion. After the passage of the supplementary package in April, nicknamed "stimulus phase 3.5," there was no substantial action on COVID-19 stimulus or relief from Congress for several months as each party proposed their own stimulus package.
Then, after the election of President Biden in November, a $900 billion stimulus bill was passed in December 2020. Another $1.9 trillion American Rescue Plan, was signed into law by President Biden on March 11, 2021.
3 Trillion Dollars was actually spent so far, the remainder being available to congress for allocation.
Most of that money was spent, not invested, and came from borrowing, not taxes, which, would have added to inflation even without the supply shock.
The supply side of the equation, however, looks much more complicated, but we will dive into that in the next article, tomorrow!
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