Sky-high inflation was the topic of ASU Professor Jonathan Barth’s recent talk at the Political History and Leadership program’s Engaging Citizenship Luncheon.
Barth’s presentation addressed the dramatic year-over-year Consumer Price Index increase of 6.8% and explored the differences between the Federal Reserve’s response to the 2008 recession and the central bank’s response to the COVID-19 pandemic.
While many blame supply-chain shortcomings and pent up demand from the pandemic as causes of inflation in the U.S, Barth is more concerned with what he believes is the Federal Reserve’s extreme monetary response to the pandemic.
Barth is particularly focused on “quantitative easing”, or QE, a kind of monetary policy where a nation’s central bank purchases long dated government bonds from the nation’s largest banks to increase the liquidity in its financial system.
When the central bank pursues this kind of monetary policy, which is not uncommon, new money is added to the market, interest rates are lowered, and the central bank’s balance sheet is expanded.
Barth says that Federal Reserve Chairman Jerome Powell has embraced quantitative easing.
From 2020 to 2022, Powell has overseen the central bank’s increase in the nation’s money supply (M2) by 42%. Federal Reserve assets are up $4.7 trillion and excess reserves of depository institutions are up $2.2 trillion. From March of 2020 to December of 2021, the Fed’s balance sheet increased from $4.2 trillion to $8.6 trillion.
“The latest quantitative easing has led to a jump in the supply of money,” Barth said. “Banks did increase reserves, but the money supply in the U.S. economy has increased by 42% in the past two years.”
All this means that the Federal Reserve has purchased trillions in assets to add new money to the economy. But Barth says Powell has done so with newly printed money dollars “created out of thin air.”
Barth posed this question to his audience: “Why didn’t we see this kind of inflation when quantitative easing was used during 2008-2014 when the U.S. experienced the housing crisis?”
The 2008 housing crisis began with the collapse of subprime mortgages, which essentially burst what was known as the housing market bubble. Imprudent lending led to a significant number of loans in default. The confluence of these factors led many financial institutions to require a government bailout. Homebuilders, the stock market, as well as the U.S. and world economies experienced the greatest recession of the 21st century.
From 2008 to 2014, Federal Reserve Chairman Ben Bernanke saw a 37% increase in money supply (M2), a $3.2 trillion increase in Federal Reserve assets, and an increase of $2.5 trillion in the Fed’s excess reserves of depository institutions.
Barth noted that over these six years, the Fed’s balance sheet increased from $900 billion to $4.1 trillion.
The two periods of QE were different, according to Barth.
“Powell’s Federal Reserve has managed a 37% increase in money supply in roughly one-third the time that it took Bernanke’s Fed to experience a 42% growth in money supply,” Barth said.
But Barth says that Bernanke never saw the kind of significant inflation that Powell is seeing today.
Data provided by the Board of Governors of the Federal Reserve System, shows the difference in uptrend during the two time periods.
Original source can be found here.