We’re Headed toward Stagnation—Unless the Fed Reins In Its Money Printing

Frank Shostak

The US Fed is considering lifting its inflation target above 2 percent in order to revive the economy. Contrary to the accepted practice, the Fed is not expected to raise an alarm if the measured price inflation begins to rise. The US central bank is not expected to counter this increase with a tighter monetary stance as in the past. In fact, the idea is to continue robust monetary pumping until the economic data points toward a strong economy.

According to most experts, when an economy falls into a recession the central bank can pull it out of the slump by pumping money. This way of thinking implies that money pumping can somehow grow the economy. The question is, How is this possible? After all, if money pumping can grow the economy, then why not pump plenty of it to generate massive economic growth? By doing that central banks worldwide could have already created everlasting prosperity on the planet.

For most commentators the arrival of a recession is due to shocks such as the covid-19 that push the economy away from a trajectory of stable economic growth. Shocks weaken the economy, i.e. lower the economic growth, so it is held. As a rule, however, a recession or an economic bust emerges in response to a decline in the growth rate of money supply. Note that a decline in the monetary growth works with a time lag. This means that the effect of past declines in the growth rate of money supply could start asserting their influence after a prolonged period. 

It is likely that the present economic slump was set in motion by a strong downtrend in the yearly growth rate of AMS money supply from 14.3 percent in August 2011 to –0.6 percent by August 2019. As a result, various activities that sprang up on the back of the previous strong money growth rate came under pressure. (Observe that the yearly growth rate of AMS jumped from 0.7 percent in March 2007 to 14.3 percent by August 2009.) These activities cannot fund themselves independently. They survive on account of the support that the increase in money supply provides. The increase in money diverts to them real savings from wealth generating activities and consequently weakens wealth generators.

A decline in the growth rate of money supply undermines various false nonproductive activities, and this is what a recession is all about. Recessions, then, are not about a weakening in economic activity as such but about the liquidation of various nonproductive activities that sprang up on the back of the previous increase in money supply……More Here

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