I was recently asked what keeps me awake at night about our corner of the economy. Answer – 3 things: Taiwan, India and Inflation. Taiwan, we talked about in a recent column. It’s the source of two thirds of the world’s semiconductor chips and is currently afflicted with supply problems due to a water shortage on their small, politically contentious, island republic off the coast of China. India, we read about in the news now every day as they experience a huge surge in COVID cases, stretching the healthcare system almost to breaking point in many areas. India is home to 1.4 Billion people as well as over half of global vaccine manufacturing and a huge chunk of pharmaceutical supply. If you needed evidence of how interconnected human life is – there you have it. Both countries, I have to say, are among my favorite places to visit for a number of reasons, among which, are the incredibly positive natures of the people there. The crisis in India is literally life and death and the US, with other countries is helping out, as we should. We’re all recent descendants of apes clinging to this little rock spinning through a hostile universe. If we don't hang together, well, you know what happens.
Inflation, though. This is a more insidious matter that is not necessarily grabbing headlines but can be as devastating to human progress and welfare as a viral epidemic. I read in ICIS Chemical Business last week that A poll of economists showed that 54% of respondents reported material cost increases, up from 33% in January, according to the results of a survey released by the National Association for Business Economics. The Net Rising Index for prices charged more than doubled in April from its January reading to 31, up from 15. Clearly then, the inflation monster is pushing its ugly head out from under the bed. Yes, that is enough to keep me awake. Crude analogy. Inflation’s like running on a treadmill and someone increases the speed without consulting you. You run faster, just to stay in place. Inflation also makes it difficult to plan and encourages short-term thinking as you’re not confident in the value of your dollars in the long term.
So what woke up the inflation monster, thus keeping those of us who care about such things, awake? I’m not going to claim to be an economic expert with all the answers, but something has happened in the past year that has not happened in recent history and certainly never in the US in peacetime. That is a huge expansion in the money supply. All the stimuli, bailouts and government projects aimed at the effects COVID and other evils; they have not been paid for out of savings, taxes or even primarily debt. The term “printing money” which you may read about, is a lot more literal than metaphorical. The Federal Reserve controls and keeps track of the supply of dollars. A couple of measures are used M1 is cash and liquid deposits in bank accounts. M2 is M1 plus short terms CD’s and money market accounts. Both measures have seen huge increases since the start of the pandemic. For example, M1 was at about $4 Bn at the start of the pandemic and it had already been increasing unusually rapidly since the 2009 financial crisis. Today it stands at about $19 Bn – more than quadrupling in a year. Where’s all this money coming from? Much of it is from the Fed itself whose balance sheet today holds $8 Trillion of assets from bond buying activities – up from $4 Trillion just before the pandemic and about $1 Trillion before the 2009 financial crisis. Where did the Fed get all the money to buy all those assets? It was created – by the Fed.
If you’ve had a dollar in your pocket since before COVID hit, that dollar is now competing with a lot more dollars for more or less the same amount of goods as before. Something has to give and who it hurts most, of course, are the ones with not that many dollars in their pockets to begin with. That’s what keeps me awake and that’s the scoop for this week.