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A $10 Trillion Rescue Package: Will it Ignite Inflation?

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“Inflation is always a monetary phenomenon that occurs by a rapid increase in the quantity of money.” —Milton Friedman (Nobel Prize Recipient)

Inflation averaged 3.2% since 1914; today it sits anchored at .2%. There have been episodes of high inflation rates over the past half-century stemming from excess liquidity. Money supply growth (blue line) has risen by double-digit rates; this, at times, has sparked bouts of inflation. In 2020, money supply (M2), comprising cash, checking accounts, and savings accounts has swelled a whopping 23%, from $14.4 to $17.9 trillion, a $3.3 trillion increase, whew! The surplus in liquidity has been a boon for investors owning financial assets.

Historically, a substantial increase in the money supply, as measured by the monetary aggregate M2, has accompanied elevated periods of rising costs. Monetarists suggest that the money supply is a primary factor influencing demand in the economy. Keynesian theorists advocate that stimulative fiscal policy is essential to curtail job destruction and reignite economic activity, after an exogenous shock. Covid19 has squeezed supply chains and seized consumer spending, sending our economy into a sharp recession. The federal government unleashed $10 trillion in fiscal stimulus and central bank monetization to address the coronavirus economic storm,

According to Yogi Berra, “a nickel ain’t worth a dime anymore” was his novel way of saying that a rapidly rising inflation rate is undesirable. Presently, financial markets, analysts, economists, politicians, and the Fed, do not foresee inflationary headwinds. However, if the $10 trillion and counting rescue package proves to be more than was necessary to resuscitate the Covid19 recession, and the economy picks up steam faster than is expected, perhaps then we may have a new problem, Inflation!

Savvy market participants are keen to keep their eyes focused on the rising prices of goods and services and potential threats to their fixed income holdings, particularly long-dated bonds. One thing that is promising occurring from an inflation bout is that it makes it easier for the federal government to service its debts by collecting higher taxes and draconian indexing.

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