This chart that I've put together has the basic economic figures that factor into calculating prices that consumers encounter in the economy. The equation to calculate economic prices is as follows:
Price = (Money Supply X Money Velocity) / Real DGP
or
P=(MV)/Y
Here is the breakdown of each graph on the chart:
Blue Graph = Money Supply (M) Yellow Graph = Money Velocity (V) Grey Graph = Real GDP (Y) Red Graph = US Consumer Debt Black Graph = Consumer Price Index (US Inflation)
With this chart, we can visualize why (until February 2020) the US Federal Reserve had problems reaching it's 2% core inflation target, even after adding nearly $5 Trillion to the money supply during QE1, QE2, and QE3. The reason is that money velocity has been falling, but real GDP has been rising. So, when we think of the equation P=(MV)/Y, you can see that as M has gone up, V has fallen, and Y has risen in a way that has kept the equation relatively stable.
Plugging the numbers into the equation:
P = (16298 X 1.43) / 21729 P = 1.07
With a price figure of 1.07, we can see why prices are currently relatively stable, with consumer prices at about 107% (roughly 7% YOY) despite the Trillions that have been printed by the Fed.
So, why aren't we seeing more significant price inflation? And will we ever see an inflationary response from the Federal Reserve's seemingly LIMITLESS printing? Well, one way that could happen, is if we had a substantial decline in real GDP, and we're actually seeing that right now on a global level. Countries all around the world are experiencing massive declines in real GDP, due to the global economic gridlock resulting from the coronavirus. The question is, how much will GDP fall? If GDP falls substantially, it could result in an increase in consumer prices. However, you can see how the blue graph is spiking, as the Fed prints Trillions in an attempt to stimulate the economy. The printing may offset inflation pressures generated the drop in real GDP, if it's proportionate.
With that said, printing to offset inflation due to collapsing GDP is a rabbit hole or sorts, because there is no identifiable breaking point between acceptable inflation and hyperinflation — especially when central bank printing is this aggressive. It's not like with 9.99% inflation, it's just "inflation," and then at 10% you trigger a runaway effect.
It seems as though the Fed could soon find itself in a very bad situation. If we continue printing this aggressively, we could find ourselves at a point where the Fed needs to decide between stimulating the economy (which currently seems like a never-ending objective) or combating inflation.
The other thing worth considering is the Fed's other primary weapon of economic defense — adjusting the Federal Funds Rate. Currently, the Federal Funds rate is basically at zero percent. So, they can't cut rates without going negative. That could be part of the reason why they've printed $4.7 Trillion already this year. I wouldn't be surprised if we see negative rates though, especially if the economy continue to collapse.
Finally, the orange graph is the total public debt in the US, minus several multi-trillion dollar liabilities, such as mortgages, social security, and medicare. The personal debt of US citizens, excluding the aforementioned figures, is about $77 Trillion. When you include mortgages, social security, and medicare liabilities, you get the total "unfunded liabilities" debt of the US, which is a staggering $137.3 Trillion. That's ONLY the US. If you include other countries, the figures may reach as high as a Quadrillion dollars in liabilities. Extreme debt acquisition is a systemic problem in the global economy, and it is at an increasingly high level of risk, as the debts continue to rise and the global economy experiences significant problems.
So, while the Fed can print money to stimulate the economy, there is a delicate balance that they must maintain to control inflation, especially as we experience a collapse in GDP during this recession. I've seen estimates that GDP could fall as much as 25% this year, which is unprecedented. Eventually, inflation WILL present itself. As the money velocity (yellow graph) continues it's steady decline, and the economy slides deeper into recession, falling GDP could force the Fed to expand the money supply by tens of Trillions more, in order to maintain price stability in the economy.
However, I don't fear the Fed's actions as much as I fear the orange graph on this chart. We are in a debt based economy, which clearly can't function without the constantly rising acquisition of new debt. If the Fed simply loses control of interest rates (as we've already seen briefly in the overnight repo market) debt liability and defaults could surge to a point that is like nothing witnessed in modern day finance. Jerome Powell has said that the Fed would expand the money supply to support the markets "indefinitely." I'm failing to understand how that will have a happy ending.
I'm The Master of The Charts, The Professor, The Legend, The King, and I go by the name of Magic! Au revoir.
***This information is not a recommendation to buy or sell. It is to be used for educational purposes only.***
Debt is the best place to be as an individual, small company or big corporation in the mist of inflation or hyperinflation also if a reset occurs that debt will be wiped .. trump seems willing to bankrupt the Fed and at this point may be the best thing to do
Rmillz11
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@Boss_Coyote, You're playing a very dangerous game.
polskiboyy
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@Boss_Coyote, this is my father's mentality too, its crazy to think so irresponsibly
mar10lai
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Could one argue that our current inflation is way underestimated? We measure inflation with CPI. It’s a relative metric compared to ones ability to afford a basket of goods. The Revenue Act of 1913 re-enacted federal income taxes and lowered tariffs. Coincidentally, the Federal Reserve Act was also enacted during Woodrow Wilson’s time, giving birth to the central bank. So, with lower tariffs, we import cheap shit from China and that is how we have kept things affordable and why wages have stayed relatively stagnant. The Fed every year looks to basically check if we can still afford things, right? Can’t lower interest rates? Well let’s print money because that is how you push spending. Why is the Fed so motivated to have us spend money? Because someone spending (debt or not) is someone else’s income, which then can be taxed. Taxes drive government government revenue why is that important, well because the Fed needs to get paid back for the money it’s loaned to the US government. The Fed is a private institution with private shareholders. No one ever asks who are those private shareholders! But one thing I know in economics is that private institutions are profit maximizing and will act and do things all in the name of profits! So, If I look around, everything that is “overly expensive” is made in the US: education, healthcare, housing, our stock market (US based companies). All the extra capital we print, has found our way into things that are quite possibly not even reflected in how we measure inflation. This has been debated by economist. Should we maybe move toward something that more accurately describes our true cost of living in the US? Going back to importing cheap shit now. So then, I can’t help but think, everything we own that is “made in China”, if it were made here, how much more expensive would our basket of goods be? We now apply a much more entitled and expensive workforce toward making the same products (and arguably at an even less efficient manner too since we just have a smaller population). Maybe inflation is understated in this sense and we have actually been taking the economies temperature with an antiquated thermometer.
mabonyi
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@mar10lai, absolutely CPI is bullshit for a while now, especially conspicuous since 2008. It only pays attention to specific sectors of the economy and consumer-facing prices set by industry. The thing is, prices hit a point of "it can't really be that much cheaper". I pay a few bucks for some bananas, but that's all the attending machinery to get it to me, not the fruit itself. A banana alone is less than 1c. It's from a tree, after all, picked and packed by machines or Salvadorian slave labour. If CPI included business to business, GDP for asset purchases, mortgage and credit premiums, and fundamental asset values separated from speculation, then you'd see the big 8% - 18% inflation, possibly more after 2008. I'd even accept that we never stopped the hyperinflation under Carter in the late 70s, early 80s.
There are more rent-seekers than producers. You can't print $50 trillion dollars in that situation and hope it solves anything. The issue is stagnation of progress and over-efficiency for profit (obsession with price & earnings growth, versus technological/cultural/infrastructural/other visible growth measured with eyeballs).
They're keeping consumer prices of coffee and bananas down by just not giving everyone money, which I'd argue is actually what you need to do, with something like a UBI, if you want real growth and opportunity generated in this economy. Just being like China isn't the answer. Manufacturing more crap isn't progress. We need ambition and wealth of opportunity to do that, which means some modest money, handle the inflation by working hard, and let the economy organically find a new equilibrium. Until we do that, we're going to be paying 265% commissions on assets, shouldering $173 trillion dollar debts, and working on meaningless rubbish for 40 years before retiring literally, socially, and spiritually impoverished.
Netromforlife
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Great analysis - and seems like you're well educated besides TA! Keep up the good work.
windedwombat
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Great article thank you Magic
CoinBlank
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"I'm failing to understand how that will have a happy ending."
Hard to say. A lot of this is in the moment. The Fed typically looks at metrics as they change and try to use whatever tools they have in order to make sure things don't get worse. What can certainly be said is that this is preventing things from getting exacerbated. At the end of the day though, I suppose this is why many investors are hedging their bets with gold, silver, US 10 year T-bonds, BTC, etc... We simply do not know what's gonna happen and so the best thing we can do is just hedge.
This extreme privilege we have, as US citizens, where we can print money and give it to our citizens so that we can spend it on goods and services people worked for... the ones who benefit the absolute least are those who have to earn these dollars, especially those in developing countries.
gummygum
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Maybe I'm just being dense... but if P = (MV)/Y, wouldn't increasing in M (Fed printing) and decrease in Y (GDP) have the same effect on boosting P (inflation)? How does printing offset the pressure from declining GDP?