2008 vs. 2020 Part Three: Monetary Stimulus
Posted September 21, 2022
The US Monetary Base surged nearly twice as much following the Crisis of 2008 as it did following the economic crisis caused by the Covid pandemic in 2020. Yet Inflation has been far higher during the last two years than it was following the earlier crisis.
That is not the outcome that would have been expected, at least not by Monetarists, who believe that increases in the Monetary Base cause increases in the Price Level. According to Monetarist theory, the larger increase in the Fed’s Total Assets following 2008 should have resulted in a larger spike in Inflation. But the opposite outcome occurred: Inflation was much higher following 2020 than following 2008.
The latest Macro Watch video unravels this mystery.
It shows that the spike in Inflation following 2020 had more to do with Fiscal Policy than with Monetary Policy.
More specifically, it shows that the recent spike in Inflation was not caused by the large increase in the Fed’s balance sheet nor by the very large increase in government debt, but instead was the result of how the Fiscal Stimulus was structured in 2020 and 2021.
That means the current high level of Inflation was caused by decisions made by the Treasury Department rather than by decisions made at the Fed.
In response to the economic crisis caused by the Covid pandemic, Fiscal Policy was in the driver’s seat. Monetary Policy played only a supporting role.
Looking ahead, however, Monetary Policy, not Fiscal Policy, will have to bear the responsibility for bringing Inflation back under control.
The video concludes with a look at how restrictive Monetary Policy is likely to impact the economy, employment and asset prices during the months ahead, as the Fed struggles to control Inflation.
For all the details, Macro Watch subscribers can log in and watch this 15-minute video now. The presentation contains 43 slides that subscribers can download.
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On a separate note, for a list of Autobiographies that I found fascinating, click HERE.
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