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)

UK dangers Italy-style decline as financial challenges mount – think-tank

Skyscrapers in the financial district of the City of London can be seen from City Hall in London, Britain, on May 8, 2021. REUTERS / Henry Nicholls

Britain faces a decade of major political challenges that could bring economic performance closer to that of Italy than Germany, Europe’s powerhouse, a think tank said Tuesday.

The Resolution Foundation said the UK needs to address Brexit-related issues on top of those of other countries, including the impact of COVID-19, the transition to a net carbon-free economy, an aging population and technological change.

Without proper planning, Britain risked the slowest productivity growth in over 120 years in the past decade and higher inequality than any other country in the European Union except Bulgaria.

“The UK’s recent record of poor productivity, stagnant living standards and high inequality makes a new economic approach desirable,” said Clive Cowdrey, founder of the Resolution Foundation.

“What makes a new approach essential is the extent of the changes to come.”

Prime Minister Boris Johnson has pledged to “level” the UK economy by targeting investment and jobs in areas lagging behind London and in areas around the capital. He also speaks of a “global Great Britain” after leaving the European Union.

However, the Resolution Foundation said the UK has no plan to meet these goals over the next decade and the country is risking wasting economic strengths such as high employment levels that are now being jeopardized by increasing automation.

When the Resolution Foundation launched an investigation with the London School of Economics’ Center for Economic Performance, it said Italy had seen no growth in GDP per capita in the past two decades, while Britain had recently fallen further behind Germany.

“If the UK’s pace of underperformance against Germany continues at the same pace in the 2020s, it will end this decade with a GDP per capita much closer to Italy than Germany,” the think tank said.

The research is funded by the Nuffield Foundation, a charity that funds social policy research.

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Packed parks, lurking virus? Worries mount as Italy reopens | Your Cash

MILAN (AP) – Italy’s gradual reopening on Monday after six months of rotating virus locks is not satisfying anyone: too cautious for some, too hasty for others.

It’s too late to eat too much outdoors for Italy’s restaurant owners, whose survival has been threatened by more than a year of recurring closings. The country’s ongoing 10pm curfew is dampening the theater’s reopening and is seen as poor public relations for Italy’s main tourism industry, which is hoping overseas visitors can finally return in the second summer of the pandemic. The government has also faced strong pressure to reopen from Italy’s right-wing parties.

However, the country’s tired virologists and medical workers fear that even the provisional reopening planned by Prime Minister Mario Draghi’s government will invite a jack-of-all-trades who risks a new virus surge before the current one is really suppressed.

“Unfortunately, as I have had to repeat many times: the virus does not negotiate. In addition, the virus has managed to adapt, become more aggressive and widespread, ”said Professor Massimo Galli from Sacco Hospital in Milan.

In a preview of what many fear, Italians crowded the streets, squares and parks of cities from Rome to Turin, Milan to Naples on Sunday – a day before virus restrictions were eased – as the warmer weather made an unusually cold one Spring pushed aside.

The Italian Interior Ministry recognized the risks and on Sunday directed law enforcement officers to ensure social distancing and the wearing of masks are enforced so that the easing of restrictions does not lead to a new virus spike.

Italy has the second deadliest pandemic in Europe after the UK with over 119,000 confirmed deaths. And experts say the number is low because more Italians suspected of having COVID-19 died in the spring of 2020 before they could be tested.

By Monday, 15 of Italy’s 21 regions and autonomous provinces will have the lowest coronavirus restrictions. For the first time since autumn, interregional travel is allowed. The number of people who can visit friends and family at the same time doubles from two to four. In restaurants and bars, people can dine al fresco. Contact sports can be resumed outdoors.

However, plans to fully reopen Italian high schools in the last six weeks of the school year ran into inadequate public transport and had to be reduced to at least 70% of personal school attendance for the upper grades.

Four southern regions – Basilicata, Calabria, Apulia and Sicily – as well as tiny Aosta on the French border in the north continue to be subject to stronger second-tier virus restrictions.

The Italian island of Sardinia – the only region completely free of restrictions this winter – was plunged into the red zone in mid-April after the all-clear signal led to a surge in new infections. Sardinia has become a cautionary story quoted by Italian virologists.

The reopening will take place even if the intensive care units in Italy remain above the alarm threshold of 30%. Italy’s vaccination campaign is also still far from its target of 500,000 shots a day and is only now trying to protect people between the ages of 70 and 79. The World Health Organization says people over 65 caused the vast majority of COVID-19 deaths in Europe.

“There are two words that should guide us in the next few days,” said Health Minister Roberto Speranza on Sunday. Trust, because the measures worked, and be careful. We have to take it step by step, take it step by step and evaluate the development day by day. “

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