I'm pretty damn sure the Fed is asleep at the wheel. Powell is simply a scared dumbass, who won't raise the interest rate on his watch. I just hope we don't see another Volcker like we did in the early 80s. My god, it's painful just looking back.
I do agree Powell should be replaced with someone who better understands what they are doing. Elizabeth Warren should be listened to in this regard. We have inflation which looks worse than it is relative to the little inflation we have had the past 15 years. The fuel for inflation was provided by the extraordinary deficits of the Trump Presidency (7+ Trillion). This represents 7+ trillion of additional money into bank reserves which would normally have remained largely mopped up by subsequent Treasury bond sales in equivalent amount; yet as soon as the Pandemic threatened, the Powell Fed, under constant needling from the Trump administration, set about to reverse the mopping up of reserves by constant bond purchases. This had the effect of swelling reserves right back up, and pushing rates right back down to rock bottom level. This also added an extra goose to the economy, much, of course, to the pleasure of the previous administration which was headed into an election. Into this context of swollen reserves and low rates came then the Biden Pandemic relief funds, which not only amply compensated those out of work because of the pandemic but also provided some additional demand side stimulus. Given Pandemic related, diminished and choked supply lines, we should not be surprised that the demand side stimulus of the past 9 months furnished the catalyst needed to heat up inflation.
We are not having, nor will we have, hyperinflation. Wray said something interesting about hyperinflation back in 1992 that I'll pass on here, but I have yet to fully digest what he wrote:
"...the belief that hyperinflations are caused by the government 'printing too much money', running the printing presses 'at full speed' captures only the effect, not the cause of the problem. It is usually a breakdown of the tax system, rather than the speed of the printing presses alone, which creates the hyperinflation. While it may be superficially accurate to call this a case of 'too much money chasing too few goods', this does not identify the source of the inflation."
My best guess at the moment as to what Wray was getting at is that taxes, like bond sales, drain reserves. But taxes, unlike bond sales, don't result in any additional bonds held in the private sector; bonds represent latent reserves and potential inflation. They are just money delayed. Taxing, for good or bad, is a power not given to the Central Bank, but remains with the "Peoples House." That's characteristic of democracies, an arrangement that even today most Americans seem happy with. But Lord help us if our Congress does not tax wisely, because the power to tax is the power to destroy net private sector wealth.
The MMT economists say we don't need to tax to pay the government's expenses; we very much do need taxes, however, for other reasons.
_______________
*Wray, L. Randall, "Understanding Modern Money," Pg 85 (1992) Edward Elgar, Cheltenham, UK.
