Are We Creating The Next Crisis With What We’re Doing To Get Through This Crisis?
Jerome Powell, 16th and current Chair of the Federal Reserve.
Fighting a Panic and Shutdown With a Flood of New Money
We are currently in the midst of an economic crisis, and when the U.S. goes through a crisis, it tends to deal with it by creating new money. The chart below shows roughly two decades of data, during which the money supply has seldom gone down for any extended period of time.
As you can see, money supply started to rise with the recession of 2000-2001 and continued to rise for next few years until the Spring of 2006. Almost none of that money was withdrawn, and money supply stayed fairly flat until the next crisis, the Great Recession – during which money supply was expanded rapidly and then increased gradually until we reached our current crisis. The large uptick seen below at the right tail is during the time of the recent lockdown and financial panic. The U.S. has stimulated with easy money when times have been tough, but hasn’t withdraw the money when times have been better. This is how we roughly quintupled our money supply in the time period shown.
Why Fed Creates Money During Crises
It’s understandable that we expand money supply when we hit panics. As you can see below, recessions (visualized by the gray bars on the chart) tend to be anti-inflationary. Sometimes that means we have deflation (meaning the prices of goods and services in general go down, shown below when the blue line dips below zero), or sometimes it means we have ‘disinflation’ (when prices go up but at a very slow rate, as shown below when the blue line nears but doesn’t cross the zero line). The government fights that by expanding money supply. But then they haven’t historically contracted back to normal afterwards.
Why the Fed Created So Much Money So Quickly
Did the recent financial crisis create the same pattern as usual, meaning falling prices? The chart below shows that it did. Perhaps out of fear, people held onto cash. Maybe even more importantly, government regulations made it impossible for people to spend in many sectors of the economy. When people hold onto money and don’t buy things, prices drop. People ‘demand’ money out of fear (or out of legal requirement) and they don’t demand goods and services (or are forbidden from fulfilling their desire to buy). So, we had deflation. Governments don’t like deflation, so they revved up the printing press (well, it’s no longer really a press so much as electronic entries). But what happens as both the fear and the prohibitions wear off? One very real possibility is a significant increase in inflation. And if things get too out of hand, inflation can become a crisis.
Originally published on Townhall Finance.
Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.
Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.
Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.
Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.
Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.
Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.
Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.
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