‘Inflation is a monetary phenomenon – and not transitory’

MMT dismissed as 'hogwash' as chief economist points to historical money printing failures

‘Inflation is a monetary phenomenon – and not transitory’

The sheer amount of monetary stimulus pumped into the economy means inflation will be more permanent than many analysts are predicting.

That’s the view of Brian Wesbury, chief economist at First Trust Portfolios, who reminded investors that, in his opinion, inflation does not come from rising wages, government deficit spending or rapid economic growth. Instead, he believes it's the result of “printing too much money”, referring to Milton Friedman's statement that inflation is too much money chasing too few goods.

Wesbury understands why some believe inflation will be transitory, citing low base case and the correction of supply chain issues, he said this explains only part of the current economic picture.

“What they don't talk about and what they forget – and what we learned in the 1970s - is that inflation is a monetary phenomenon,” he said. “Go back to February of 2020, the Federal Reserve has now increased the M2 measure of money from then to now by 30%. That is a 30% increase in the amount of money in the economy and, by definition, that means the value of the dollar relative to goods and services will come down.”

Explaining the basic principles of inflation, Wesbury said that increased money supply increase prices, which can then be increased further by supply issues. When the supply issues return to normal, prices come down but the increase that arose due to the money supply hike remains. This, he argued, is the definition of inflation.

He also rubbished believers in Modern Monetary Theory – that increase money in the economy will encourage the production of more goods and services – and said their stance was “hogwash”. The idea that increasing deficit has no ill effects is a "pipe dream".

He said: “It has never worked in history; it will not work now. Yes, there are supply chain issues, there is a little bit of a base effect, but the inflation we are seeing is coming because we have increased the money supply by 30%. It is here to stay. Eventually, all prices will go up by an average of 30%. I don't know whether that takes two years, four years or six years - inflation could be 5% a year for six years and that's 30%.

“We have not increased the money supply like this since at least the early 1940s during World War Two. Even during the 1960s and 70s, we've never increased the money supply by 30% over a year. That is where inflation is coming from - and that is why it's not transitory.”