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Why Printing Trillions of Dollars May Not Cause Inflation - YouTube
Channel: CNBC
[1]
Central banks around the
world have injected money
[3]
into the economy at a record
pace to try to fight
[6]
a global recession triggered
by the coronavirus
[9]
pandemic. Just getting word
from the Federal
[11]
Reserve. Bombshell announcement
from the Federal
[13]
Reserve. It is an
absolutely historic week both
[15]
in the terms of the speed
of Fed purchases and, of
[18]
course, the magnitude.
[19]
Since mid-March, the
Federal Reserve's balance
[21]
sheet has ballooned from
4 trillion dollars to
[24]
around 7 trillion dollars,
equal to about one
[26]
third of the value
of the entire American
[28]
economy. A new CNBC
survey showing that market
[31]
participants expecting trillions
more in stimulus
[34]
from both the central
bank and Congress.
[36]
At the same time,
governments have enacted record
[39]
amounts of fiscal stimulus
to boost economies
[41]
stalled by the pandemic.
[43]
The infusion of cash
into the financial system
[46]
has renewed concerns that
inflation could surge.
[49]
As Milton Friedman said,
inflation is always and
[53]
everywhere a
monetary phenomenon.
[55]
If you believe that, you
look at the central bank
[58]
balance sheets exploding right
now and you say
[63]
there's going to
be inflation.
[65]
Supply shocks have driven up
prices for some goods
[67]
over the past few months.
[69]
Yet recent history suggests
inflation is more
[71]
likely to stay low for
a long time as
[74]
unemployment remains near record
high levels and
[76]
consumer spending
is subdued.
[78]
While this certainly is quite
a lot of disruption
[80]
to the supply side of
the economy, that's likely
[83]
to be dominated by the
huge hit to aggregate
[86]
demand. So how will
trillions of dollars of
[89]
economic stimulus affect
the outlook for
[91]
inflation?
[97]
Inflation refers to an increase
in the prices of
[99]
goods or services
over time.
[101]
One well-known measure of
inflation in the U.S.
[104]
is called the Consumer
Price Index, or CPI.
[107]
The CPI is about the
prices that we pay for
[111]
services and goods and
housing and rent.
[115]
Economists say some inflation
is healthy for the
[118]
economy. When the
economy's growing, more
[120]
consumers and businesses are
out spending money
[122]
on goods and services.
[124]
This increase in demand
results in higher prices.
[128]
Demand is an important factor
in the outlook for
[130]
inflation. Generally, when
unemployment is high
[133]
and consumer demand is
weak, inflation is low.
[138]
Another factor that affects
inflation is commodity
[141]
prices. If oil prices rise
because there's a cut
[143]
in production, gas prices
might increase too.
[146]
Consumer and business
expectations about prices
[149]
are another piece of
the inflation puzzle.
[151]
If a lot of people expect
prices will rise in the
[153]
future, they might spend
more now, ultimately
[156]
causing inflation. The level
of actual inflation
[160]
that we get will be
pretty heavily influenced by
[163]
the inflation rate that
actors in the economies,
[167]
households, businesses,
consumers, workers,
[170]
investors expect
to prevail.
[173]
Like many other central
banks around the world,
[175]
the Fed targets a
2 percent yearly inflation
[178]
rate. At that rate, a cup
of coffee that costs 2
[180]
dollars this year would cost
2 dollars and 4
[182]
cents next year, not quite
enough to break the
[185]
bank. Central banks
adjust their policies
[188]
normally by changing interest rates
to try to get
[190]
to that 2
percent inflation level.
[192]
You definitely want to
keep enough inflation so
[195]
you can still have enough
space to raise and
[197]
lower Fed funds over
the business side.
[200]
Too much inflation isn't
a good thing either.
[202]
As inflation rises, the money
that you hold today
[205]
becomes less
valuable tomorrow.
[207]
At a 15 percent inflation
rate, for example, your 2
[210]
dollar cup of coffee today
costs 2 dollars and 30
[213]
cents next year.
[215]
Think of how that would
affect a bigger purchase
[216]
like a car. A ten
thousand dollar purchase today
[219]
would cost eleven thousand
five hundred dollars
[221]
next year. When the
inflation rate is very
[224]
high, it is very difficult
to make any calculation
[228]
about saving.
[230]
Inflation concerns for now
are to the downside.
[235]
The risks are to the
downside, not to the upside.
[238]
We see prices
moving down.
[240]
That's because in a lot
of parts of the economy,
[242]
people are
cutting prices.
[244]
Lockdown's have already depressed
prices in the US
[246]
as consumers stay home
and remain cautious about
[249]
spending money in
an uncertain economy.
[252]
The second biggest drop
in headline inflation
[256]
since 1947.
[257]
Energy commodities down 20
percent, with a 20
[260]
percent decline
in gasoline.
[261]
Fuel oil down 15 percent.
[264]
There have been pockets
of inflation in some
[266]
areas, like groceries as
more people cook at
[269]
home. Disruptions in global
trade from the virus
[272]
have also raised prices
for goods like medical
[274]
supplies. Still, these
supply shocks haven't
[277]
offset overall
weak demand.
[279]
If you're in the
average person's seat, we're
[282]
talking about, you know,
grocery stores and that
[285]
sort of thing. The idea
that there's going to be
[287]
an outbreak of inflation, you
know, 4 percent, 5
[290]
percent, that is just
not on the horizon.
[293]
Many economists and policymakers
expect wages will
[296]
stay low as
unemployment remains high.
[299]
Meanwhile, people are saving
instead of spending
[301]
their cash out of fear
the economy could get
[303]
worse. To try to
[308]
boost the economy,
policymakers in Washington
[310]
have pumped trillions of
dollars into the
[312]
financial system in
recent months.
[314]
Economic theory suggests all
this money printing
[317]
could create the
risk of inflation.
[320]
Economist Milton Friedman famously
said that if
[322]
there's too much money
in the economy, chasing
[324]
too few goods
prices will rise.
[328]
When inflation was surging
in the 1980s, Fed
[331]
Chairman Paul Volcker put
Friedman's theory to
[333]
the test, and it worked.
[335]
Volcker slowed the growth of
money going into the
[337]
economy and raised interest
rates to tame
[339]
inflation. But economists say
there's been a
[342]
break in the link
between money creation and
[345]
inflation in recent years
as the banking system
[348]
has become more complex.
[350]
The rise of the financial
system and the sort of
[353]
the diversification of the
financial system is
[355]
one of the reasons why
sort of the Milton
[358]
Friedman view of the world
really is not as
[361]
applicable, particularly in the
United States, as
[364]
it was in
an earlier time.
[366]
It's important to understand
that when the central
[368]
bank prints money today, most
of it isn't in the
[370]
form of physical
dollar bills.
[372]
Instead, the Fed
creates electronic money.
[375]
It uses that electronic cash
to buy assets and
[378]
lend to banks, injecting
money into the banking
[381]
system. To buy treasuries,
for example, the Fed
[383]
uses so-called primary dealers,
a group of around
[386]
two dozen big banks
and brokerage firms that
[388]
trade bonds. What happens
when the Fed creates
[391]
money? It strictly creates
central bank reserves.
[395]
Those are held by
the banking system.
[397]
The banks decide, you
know what what they're
[400]
willing to lend out
into the economy.
[402]
That means that even if the
Fed is pumping a lot
[404]
of money into banks like
it is today, the money
[407]
won't reach the hands
of consumers until banks
[409]
lend it out. It is
true that money has been
[412]
handed out directly to citizens
as part of the
[414]
federal government's coronavirus
response, like
[417]
the 1,200 dollar
stimulus checks.
[419]
This cash infusion still
may not result in
[421]
inflation. Most Americans needed
the checks to
[424]
make day to day payments
to make up for lost
[426]
income during the crisis.
[428]
Not to go out and
spend lavishly on other
[430]
purchases. I think of
them as more life
[433]
preservers, trying to prevent
the economy from
[437]
getting into a deeper hole
because of the Kovik
[440]
crisis. And they don't
represent stimulus yet.
[445]
Recent history suggests that
all the fiscal and
[447]
monetary stimulus daring the
pandemic is unlikely
[450]
to increase prices for
consumers when the Fed
[452]
bought trillions of dollars
of assets after the
[455]
2008 financial crisis,
inflation never surged.
[458]
After the Great Recession,
there was a conviction
[461]
that all the fiscal
and monetary stimuli were
[464]
going to result
in huge inflation.
[466]
As a matter of
fact, a number investors,
[468]
including some very famous
hedge funds, went to
[471]
gold. Well what happened?
[473]
Big deficits, but inflation
has come down.
[476]
The experience of the last
decade is that central
[478]
bank balance sheet expansion
certainly need not
[482]
generate a period
of excess inflation.
[484]
And in fact, even with a
big balance sheet to be
[488]
hard to get the
inflation that you want.
[490]
There are limits to what
history can teach us when
[492]
it comes to understanding
the economic situation
[494]
right now. Even if
the economic stimulus doesn't
[497]
result in higher prices
for consumers, many say
[500]
that inflation is showing up
in the prices of
[502]
other assets like the stock
market or the housing
[504]
market. One of the
most interesting questions
[506]
that we have right now
is the difference between
[510]
the price inflation that you
and I see at the
[512]
grocery store or at the
gas pump or when we're
[515]
buying something.
[517]
That's one measure
of inflation.
[519]
But another measure of
inflation that is also
[521]
very important is
asset price inflation.
[525]
In other words, what's
happening to the stock
[527]
market and what's happening
to credit spreads?
[530]
I think we're looking
at a very significant
[533]
increases in asset
price inflation.
[535]
Inflation expectations are
another risk.
[538]
People start thinking all of
the money supply is
[541]
increasing. Inflation is going
to be higher.
[543]
Then expected inflation
becomes high.
[545]
Then you start asking for
increases in wages and
[548]
prices. And these expectations
become what we
[552]
call self-fulfilling.
[553]
In the long term,
factors like globalization,
[556]
technology and aging populations
all play a role
[559]
in consumer prices.
[561]
A weaker U.S. dollar or
a backlash against global
[564]
supply chains, which have
been disrupted during
[566]
the pandemic, could
create inflation risks.
[569]
If you were to seal
the borders and literally cut
[571]
off any imports and then
embark on this huge
[575]
monetary and fiscal stimuli,
yeah, they could
[577]
they could
create inflation.
[580]
There's one more big risk
to inflation, and it
[582]
comes with nine
zeros attached.
[585]
Record high public debt.
[586]
Trillions of dollars in
economic stimulus during
[589]
the pandemic have increased
government debt at a
[591]
rapid pace.
[593]
In recent years, some
economists have argued in
[595]
favor of deficit spending
to fund public
[597]
investment. Though many debate
what effect this
[600]
could have on inflation.
[601]
Because government debts are
set in fixed dollar
[604]
amounts, higher inflation makes
it easier to pay
[607]
off those debts.
[608]
Some worry that politicians
might put pressure on
[611]
central banks to chase
higher inflation to help
[614]
finance the growing
national debt.
[616]
We need not worry too much
about the size of the
[619]
Fed's balance sheet.
[620]
What we need to be focused
on is whether the Fed
[623]
will at the appropriate
moment have both the
[626]
judgment and the
institutional independence to
[630]
raise interest rates, even
if that might conflict
[633]
with some other interests,
for instance, the
[636]
interest of the
government of today.
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