Economists eye surging cash provide as inflation fears mount

By Karen Brettell

(Reuters) – Some economists are warning that the rising money supply could exacerbate a surge in US inflation, which has been accelerating as fast as it has been for more than a decade.

According to the Center for Financial Stability’s (including Treasuries) Divisia M4 index, money supply – which measures the circulation of currencies and cash – rose 12% year over year in April.

The measure has run between 22% and 31% every month since April 2020, fueled by unprecedented economic stimulus from the US Federal Reserve and the US government. This contrasts with an annual growth of around 3-7%, which was common from 2015 to the beginning of 2020.

“This money supply growth is just so much faster than anything we’ve seen before,” said Desmond Lachman, resident fellow at the American Enterprise Institute. “It’s a reflection of a huge backlog in the economy … it’s hard for me to understand how not to get inflation.”

Money supply https://fingfx.thomsonreuters.com/gfx/mkt/yxmpjadyyvr/Divisia%20Index.JPG

Federal Reserve chairman Jerome Powell said Wednesday the Fed would adjust its policy if inflation expectations get too high, and the central bank is postponing its first forecast rate hike from 2024 to 2023.

So far, money supply growth has not been a major driver of inflationary pressures, in large part because banks hold cash as deposits.

The Fed has also downplayed the link between money supply and inflation, and Powell said in February that monetary measures had not been a major determinant of inflation “for a long time”.

In fact, the central bank’s bond purchases after the financial crisis did not trigger the expected inflation, as it took the economy years to recover and the money supply at that point was falling.

This time around, however, banks are struggling with record deposits after the US government increased government spending while the Federal Reserve purchases unprecedented amounts of bonds.

The story goes on

There is concern that businesses, investors and consumers are drawing up their deposits and spending, while banks increase lending as the economy reopens. Some economists fear that such a confluence of factors could lead to demand growing faster than economic output and prices rising.

Money supply growth was a factor in the high inflation in the 1970s, when the government ran budget deficits and the Fed introduced loose monetary policy to stimulate employment.

Bank reserves rose to a record $ 3.89 trillion in April and are projected to surpass $ 5 trillion this year as banks sell bonds to the central bank.

Meanwhile, commercial and industrial lending by commercial banks fell from a record $ 3.04 trillion in March 2020 to $ 2.55 trillion in May, although it continues to rise above the February 2.36 trillion level 2020 lie.

The Fed may be reluctant to hike rates as the Treasury Department struggles with record debt levels even if inflation rises, said William A. Barnett, director of the Center for Financial Stability.

However, if rates on primary market lending rise without interest rates on reserves rising accordingly, it could lead to an “explosion in lending,” Barnett said. “The risk to the economy is future inflation.”

Barnett believes that much of the Fed’s bond purchases will be permanent, effectively monetizing the debt, as it did during World War II, when most of the Fed’s bond purchases were irreversible.

The Fed has announced that it will eventually expire its bond purchases when the economy recovers, after which it will have to decide whether to decrease the overall size of its asset holdings when the bonds in its holdings mature.

When it “normalized” its policy from 2014 onwards, the Fed first reinvested maturing securities to keep its overall balance sheet constant, but then allowed the balance sheet to shrink.

This time around, the Fed is far from developing a plan to actually reduce its holdings.

However, some fear that if inflation is already rising, it may be too late to act.

Last week’s data showed that consumer prices rose 5% in May, the largest annual increase in 13 years.

“The rise in inflation could be a bit higher than the Fed has gambled away once inflation expectations are embedded in the system,” said Kim Rupert, managing director of Action Economics.

(Reporting by Karen Brettell; Editing by Dan Grebler)

Why economists and activists are dissatisfied over pledges

(LR) President of the European Council Charles Michel, US President Joe Biden, Japanese Prime Minister Yoshihide Suga, British Prime Minister Boris Johnson and Italian Prime Minister Mario Draghi pose for the official welcome and family photo of the heads of state and government during the G7 Carbis Bay Summit on June 11, 2021 in Carbis Bay, Cornwall.

Leon Neal | Getty Images News | Getty Images

LONDON – A three-day meeting between the heads of state and government of some of the world’s richest nations was a failure, according to some economists and activists who argue the group fell short of its own standards to agree on comprehensive action to combat the climate crisis and Covid-19 pandemic.

The leaders of the G-7, a group of the world’s largest so-called advanced economies, issued a joint statement on Sunday pledged to enact measures on Covid-19 vaccines, China and global corporate tax.

The guides met after meeting in the seaside town of Carbis Bay in Cornwall, England promised another billion Covid vaccine doses either directly or through the World Health Organization over the next 12 months COVAX to plan.

The communique on Sunday also urged China to “respect human rights and fundamental freedoms, particularly with regard to Xinjiang and those rights, freedoms and a high degree of autonomy for Hong Kong, which are enshrined in the Sino-British Joint Declaration and the Basic Law” .

The G-7 pledged to eradicate their contribution to the climate emergency, reaffirmed their commitment to achieving net-zero greenhouse gas emissions by 2050, and vowed to eliminate most of coal energy. It also supported a minimum tax of at least 15% on large multinational corporations to prevent companies from using tax havens for tax avoidance, a US-led initiative

The announcements have been considered significant by groups such as COVAX and the Confederation of British Industry, the latter of whom said the summit “rekindled the belief that the international community can come together in a spirit of cooperation to address the great problems of our time. “

However, critics say the promises are not new, there is a lack of detail and some are simply inadequate.

“The G7 leaders have completely failed to face the challenges of the world,” said Nick Dearden, director of the Global Justice Now campaign group. “After a diplomatic weekend, they just repeated their own inadequate climate goals and failed to meet their own inadequate global vaccination goals.”

“This G7 summit has been, by and large, a pointless exercise without making significant progress in addressing the crises of our lives. This summit proves beyond any doubt that the G7 is unsuitable for its purpose, ”said Dearden.

The G-7 consists of Great Britain, Canada, France, Germany, Italy, Japan and the USA. The EU, which sends the Presidents of the European Commission and the European Council, also participates. Australia, India and South Korea were also invited this year.

“Cracks are still there”

The summit was seen as a unique opportunity for policymakers to meet in person and agree on the actions necessary to address some of the most pressing global issues such as the ongoing coronavirus and the climate crisis.

The communique did not contain a detailed country-specific commitment or a timetable for the implementation of the global Covid vaccination campaign, and many of the commitments had been agreed in advance.

In a statement on Monday, Paul Donovan, chief economist at UBS Global Wealth Management, described the G-7 as a “selfie summit”.

“The focus of the G7 meeting (the photo opportunity) seemed to be going well. The rest of the meeting expertly whitewashed the cracks,” he wrote.

Speaking to CNBC’s Squawk Box Europe, Donovan added, “We didn’t have the same direct, big impact. We had a lot of vague statements.”

“The rifts may not be as deep this time around because of the change in leadership in the United States and the fact that the US is playing a more active role, but the rifts are still there,” he said.

Extinction Rebellion (XR) activists take part in the Sound The Alarm march during the G7 Cornwall Summit June 11, 2021 in St Ives, Cornwall, England.

Jeff J. Mitchell | Getty Images News | Getty Images

The world’s richest countries have come under severe criticism for access to vaccines amid the pandemic.

A number of groups have pushed for the waiver of certain intellectual property rights in Covid vaccines and treatments, including the WHO, health experts, former world leaders and international medical charities.

India and South Africa jointly submitted a proposal to the World Trade Organization in October last year calling on politicians to facilitate the production of Covid treatments on site and to press ahead with the global vaccination campaign.

Several months later, the proposal was blocked by a small number of governments – including the EU, the UK, Switzerland, Japan, Norway, Canada, Australia and Brazil.

Success of COP26 “hangs in the balance”

“We have heard warm words about a green Marshall Plan and the ambition to vaccinate the world, but that goes far behind what is necessary.” said Patrick Watt, Director of Politics, Public Affairs and Campaigns for Christian Aid, a UK charity.

“This is a partial plan, not a Marshall Plan,” said Watt, arguing that the G-7 leadership has made no real progress on aid pledges, comprehensive debt relief, climate finance and “vaccine apartheid”.

“The success of the COP26 climate summit is now pending. There is still time for rich nations to put together a solidarity package that will overcome these interconnected crises. Without it, the COP will fail.”

Politicians are among are Increase pressure to deliver on promises made under the groundbreaking 2015 Paris Agreement ahead of this year’s COP26, due to take place in early November in Glasgow, Scotland.