Inflation is probably the most misunderstood quantity in economics. That is mostly because no critical examination of economic theory has been done since we left the gold standard and most economists of any esteem earned their degrees in classes using metrics that no longer exist. Inflation is no longer a direct relationship with a commodity peg and is now dependent upon available resources and labor.
Most Americans never really recovered their purchasing power after the global crash and struggle just to exist. It is estimated that almost half of the population can’t put together $500 in an emergency, which is hardly surprising considering working-class real income has steadily declined since the mid-’80s. Inflation is only a factor for money with velocity. The number in Bezo’s bank account does not affect it whatsoever.
The Fed has been urging Congress to loosen up fiscal policy for years. Monetary policy, interest rates, simply don’t supply enough economic stimulus to guide the economy when a large share of the population simply has no access to credit beyond payday lenders. Capitalism depends upon sales and sales depend upon people having disposable income. No amount of credit easing can compensate for the lack of any access to credit among those most likely to spend additional income.
Our lack of basic understanding of how fiat currency works and our stuck on stupid politicians using the meaningless debt for political gain has stymied any chance of using spending to stimulate the economy directly. The voters have bought into the false narrative of their taxes paying for spending by their government and the concept of Treasury bonds funding any spending above taxation. Already strapped for enough to pay the rent and feed their families, they are unlikely to approve any large spending initiatives they believe they will be on the hook for, meaning it may be politically impossible to salvage the economy until it crashes again.
Monetary policy will not solve our issues with the economy. Only raising the incomes of the people will avoid another crash, which would have happened already if not for the false hope of tax cuts and stock manipulations propping up the market. $22 Trillion is a big number until you understand what it really represents, which is the net total of all money in the economy after the private debt is accounted for. Bank reserves don’t add any “net” money to the economy because they are balanced with “real” debt that must be repaid with public money that only results from deficit spending. Banks don’t actually lend from reserves, which is why QE was a flop. Reserves are created to enable interbank transfers of loan proceeds but are depleted as the borrower pays down the loan’s principal with real money. They are a “liability” to the banking system, not assets.
Deficits can be too big and cause inflation, but they can also be too small if they don’t compensate for the drains of trade deficits and wealth accumulation, both of which reduce the currency in motion in the economy. A balanced budget, the holy grail of politicians, leaves nothing in the economy to store value in commerce, fund economic growth, retire private debt, or even to compensate the private sector for the resources the government utilizes. Recessions will be closer together and more severe until the politicians understand the nature of our monetary system and stop legislating to the economic myths and inapplicable gold standard rules the wealthy have promoted for decades to insulate themselves from the people’s wrath.
