By LAWRENCE KUDLOW, Special to the Sun | September 28, 2021
Let me begin this evening with some thoughts on today’s Senate hearing with Treasury Secretary Janet Yellen and the Federal Reserve chairman, Jerome Powell. The perfectly awful title of this hearing is: “CARES Act Oversight of the Treasury and Federal Reserve: Supporting an Equitable Pandemic Recovery.”
During this pandemic emergency period, going back to February of 2020, the Federal Reserve has truly done its part to inject cash into the economy. By our calculations, over the past 18-months the Fed has basically doubled its balance sheet to $8.3 trillion from $4.1 trillion. Essentially they injected more than $4 trillion of new cash into the economy.
Another way of looking at it is through the M-2 money supply, which has jumped to $20.5 trillion from $15.5 trillion. That’s a gain of $5 trillion, or 32%. Now, we’re getting into the weeds here, but I like the weeds. I started my career in the weeds 48 years ago in open market operations at the New York Fed.
The only reason I’m putting these numbers on the table is to show you how big they are. In other words, emergency pandemic relief fiscal policy spent about $4 trillion last year, another $2 trillion this past winter, and is possibly headed for $6 trillion in the next month or two. (Save America. Kill the bill.)
Meanwhile, the Fed was doing its part by pumping in $4 trillion of high-power cash, leading to a $5 trillion jump in the money supply.
All that Fed money was basically sitting idle for much of last year. In the heart of the pandemic, with the government shutdown, most folks were playing defense by hoarding cash and avoiding risk. So, the money supply wasn’t inflationary.
As the economy re-opened, through the vaccine miracle of “Operation Warp Speed,” the Feds continued pump-priming. This really begins to threaten a longer-term inflation problem.
Excess money is different from pandemic shortages. Although it’s taken longer for market forces to heal those supply chain problems, continued Fed cash injections is a different matter. And a worrisome matter.
There is a connection between federal overspending, and Federal Reserve over-pumping. While budget deficits pile up, the Fed seems to be financing government spending and borrowing.
Over the past 18-months, the central bank has purchased 57% of new, marketable Treasury debt issuance — 57%! That’s not supposed to happen.
Go all the way back to the 1951 Fed-Treasury accord, when the Fed stopped pegging long-term interest rates and stopped buying war-time bonds. You could go all the way back to 1913 with the original federal reserve act, in which the central bank’s purpose was to provide an institutionalized currency elasticity, but not to finance government spending and borrowing.
I remember that well. I was there. In Latin America, and some other places, central banks buy the debt, print all the money, inflate the economy, and destroy the currency. Fortunately, we’re not there yet. King dollar is strong and reliable. Gold hasn’t moved in quite some time. commodity prices are on the rise, suggesting that Mr. Powell & Company are too loose and even the CPI break-evens in the inflation-adjusted Treasury bond market are showing higher inflation expectations.
So, I’m getting worried. The Feds should have stopped buying mortgage bonds six months ago. It might be that they’ll taper their portfolio purchases in a couple of months. Who knows? The rise in long-term bond rates in recent weeks is probably signaling the Fed that it’s time to raise their target rate before a serious inflation breakout occurs.
Meanwhile, the Fed and, I presume, the White House were right to dump the Dallas and Boston Fed presidents for trading stocks and bonds. That’s a real big no-no. By the way, we couldn’t do that in the executive branch.
I am, though, really concerned that more and more federal spending and more and more borrowing puts more and more pressure on our central bank to finance the Democrats’ big-government socialism cradle-to-grave, welfare dependency assault on work, wages, jobs, and prosperity.
The Fed has a tradition of independence, but if it caters to the Democrats’ far-left progressive wishlist and finance it, they will lose their independence. We will lose the inflation race, and we’ll lose King Dollar in the process. and that would be most unfortunate.
