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Monetary Policy is Stimulating Inflation, Not the Economy


Not long ago there was a whisper making its way around U.S. Investor circles. With the recent round of Economic numbers being released, the whisper has increased to a dull roar: Stagflation may be back.

Of course it’s just a preliminary discussion at this point. And there is certainly a large group of naysayers who linger in denial. Some Economists continue to grasp onto the idea that inflation will not be a problem while growth is sluggish. But they miss one major point. Numbers don’t lie. Stagflation may already be here.

The recent 1st quarter Preliminary GDP report, forecasted a disappointing 2.2% growth in the U.S. economy. When at this stage of past economic recoveries, the economy is typically growing at 4% or even 5%. Prices, on the other hand, are Not mirroring the economic sluggishness, with recent CPI reports showing that prices are increasing at a 3.6% annual rate. Of course it may be early to worry about spiraling inflation, unless one were to ask, “where will prices be if we get the growth numbers that we want?” Then, inflation worries might be completely appropriate.

For now, one might simply be content to consider that the economy might stay sluggish and prices might continue to burrow higher at a mind-numbing crawl. The problem with that scenario is that steadily increasing prices may keep a quiet and unassuming cap on economic activity. And with a whimper instead of a bang, Stagflation might get an entrenched and enduring hold on the economy. At that point, quiet worry may give way to an all-out panic.

Not to fear, Some market forecasters are pointing to Sluggishness in Europe as evidence that there should be a lid on U.S. growth and inflation. The problem with that theory is Europe may be in the beginning stages of Stagflation also. Euro zone GDP is expected to grow at an anemic 0.8% this year while prices are rising at a 2.6% annual rate. 1st Quarter Eurozone GDP may actually have contracted.

In deciding how to foster economic growth, our embattled leaders struggle with discussions of QE3, while inflation hawks point out that the first 2 rounds of Quantitative Easing did little to stimulate the economy. They have, however, seemingly stoked the fires of inflation.

When it comes to the Monetary problem, U.S. leadership seems to be asleep at the helm, appearing content to focus on the Political Elections facing the country near year end. Congress and the President have unleashed some interesting rhetoric but there is little action being taken to address the fact that the country spends more than it “Earns” in tax revenue, that we are borrowing at an unsustainable rate, and that we must Print dollar bills to cover the difference.

So, in This cycle, inflation may not be a reflection of economic activity, but of Monetary Policy. The more we Print dollars, the lower will be the value of the dollars in our pockets. The result will inevitably be higher prices and a lower standard of Living. Let’s hope our leaders can put politics behind them before it’s too late.


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