Stimulus Bill: More Fuel for Inflation

And so, Congress did it. They shoved another $900 billion worth of monetary fuel onto the inflation fire:

Senate Majority Leader Mitch McConnell says Congress has reached an agreement on a $900 billion COVID-19 relief bill. … The bill will include a $300 per-week bonus in jobless benefits and a $600 direct payment to most Americans, an aid package that is smaller than Democrats and President-elect Joe Biden would like. It also includes tens of billions of dollars to pay for distributing vaccines, help schools reopen, and bail out struggling transit systems and the Postal Service.

This is money that Congress wants to send out the door in the first quarter of 2021. To do that they need cash, which they don’t have. Already before the coronavirus artificial economic shutdown, the federal government was borrowing one quarter of every dollar they spent.

It is very unlikely that the Treasury can bankroll this new stimulus package without going to the Federal Reserve asking for new money, fresh of the printer. Until the opposite has been established, it is fair to assume that the Federal Reserve will bankroll this stimulus package – and add our already existing money supply.

I am not going to beat about the bush. Congress is pouring gasoline into the economic transmission mechanisms that cause inflation. They have been doing so for the better part of a year now, and for every new pile of cash they shove into those funnels, they bring us closer and closer to the point where inflation explodes in our faces.

Take a look at Figure 1. It reports the annual growth rate of M1 money supply. The growth rate tapered off in 2018, marking the end of the Janet Yellen tenure at the Federal Reserve. She was relatively conservative in terms of monetary policy, and no friend of Quantitative Easing. Jerome Powell, on the other hand, her successor… Well:

Figure 1

Source: Federal Reserve

The Fed’s 2020 money rocket has come in two stages. The first was launched between February and September, at which point the growth rate in M1 began to subside. However, then came the second stage, which we are in the middle of now. For the first time, the annual money-supply growth rate has exceeded 50 percent.

Let me repeat that: for the first time in recorded history, the U.S. money supply is now increasing at a rate of more than 50 percent per year.

We have never been remotely close to this growth rate before. Not even during the high-inflation years in the late 1970s and early ’80s did our money supply expand this fast. Not even close: the first time we broke 20 percent was during QE in Obama’s first term. And that was just a temporary spike.

What we have on our hands now is a sustained, unprecedented and very dangerous expansion of the money supply. As of November, our M1 stood at over $6 trillion. In four short years the cash circulating in the U.S. economy has doubled. A full 70 percent of that expansion has taken place in the past year.

Make no mistake: this expansion is going to continue. The new stimulus package that Congress has put together has a monetary value equivalent to 15 percent of our existing money supply.

In plain English: just to finance the $900bn deal, Congress will have to ask the Federal Reserve to increase money supply by another 15 percent. And that is just for this stimulus package. Then add all the other insanely irresponsible spending, plus the structural budget deficit, and you will be unfolding a scary money-to-inflation scenario.

But it doesn’t stop there. The federal budget is not the only source of money printing. As I have explained in recent articles, our stock market is also going to require cash from the federal reserve. Then we have all the spending that a tentative Biden/Harris administration would request from Congress.

How fast will this get inflation going, and what kind of inflation numbers are we looking at? To answer that question we need a more elaborate analysis than this article can offer. Stay tuned for another article.

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