Where did the $12 trillion of covid spending go?
Part 8: Dishonest journalists
This is part 8 of my series on the strange post covid market rally due to $12 trillion in new spending.
Part 1 was focused on purchases of mortgage backed securities by the Federal Reserve.
Part 2 was focused on increases in asset prices across all sectors and asset classes.
Part 3 was a satirical alternative explanation of what could be going on.
Part 4 was about the likelihood of future inflation and hedging strategies
Part 5 discussed the role USD has as a reserve currency
Part 6 discussed Warren Buffets assertion that low rates help tech stocks
Part 7 discussed a jump in personal savings
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I try to stay open minded and actively look for reasons an unprecedented jump is US money supply won’t lead to inflation or other harmful market distortions. I came across NY Times Paul Krugman article on the subject which I found interesting.
Rather than give me a different perspective of the Fed policy since the covid pandemic, it reminded me that journalists can be dishonest despite their technical background in a subject. From name calling, to purposely cutting off charts to prove his point, Krugman’s article is a great example of having a discussion in bad faith.
How to be dishonest when talking about inflation
Mischaracterize the argument and the people making it
Krugman starts off well enough. He admits inflation is a thing and appears reasonable:
But a lot of the money-printing panic is, I believe, coming from the crypto crowd. I’ve been in a number of extended (and determinedly civil) discussions with boosters of Bitcoin etc., doing my best to keep an open mind. What happens in these discussions is that skeptics like me keep pressing for an answer to the question, “What problem is cryptocurrency supposed to solve, exactly?” And at some point the answer always devolves to some version of “Fiat money is doomed because the Fed won’t stop running the printing press.”
I talk to plenty of people that aren’t invested in crypto that are worried about the Federal Reserve increasing the money supply by 23% in one year. This has nothing to do with cryptocurrency.
Krugman never once mentions the actual increase in the money supply. This is how he characterizes the opposing argument:
There are actually two big fallacies in the “printing press goes brrr -> inflation” story.
The article is titled Return of the Monetary Cockroaches when it should have been titled, Why it’s Not a Problem that 1 out of 4 Dollars Have Been Printed in the Last Year. That’s an article I would like to read.
Speaking of cockroaches…
Call those with opposing viewpoints names
He calls the idea that inflation is a possibility a “cockroach” idea and there has been an “infestation of monetary cockroaches”.
When he’s more generous, he refers to them as modern inflationistas:
The other fallacy of the modern inflationistas is that they don’t understand how the role of money changes in a world of very low interest rates, even though we’ve been living in that kind of world for a very long time.
The role of money changed considerably in 1971 when the US unilaterally terminated the convertibility of US dollar to gold. I wouldn’t consider that “a very long time”, but what do I know.
It happens in other places, not the US
To his credit, Krugman doesn’t deny inflation ever happens. It just happens it places like Brazil.
To be fair, printing huge amounts of money to pay the government’s bills does in fact lead to high inflation. Take the example of Brazil in the early 1990s
But nothing like that has happened in the U.S., even during periods when monetary aggregates like M2 have increased dramatically.
Krugman doesn’t consider inflation above 12% in the 1970’s as “high inflation”. To put that in perspective, a $100k mortgage would cost $1,028 at 12% compared to $421 at 3%. Inflation of 12% would cut your savings in half in just 6 years. Inflation affects the mostly the poor and middle-income Americans as the wealthy have investment options to shield their savings and spend a smaller percentage of their income on consumption.
Krugman doesn’t even mention the history America had with inflation. He also fails to mention that the recent increase was more than double any increase the US has ever seen.
Which brings us to:
Show an unnecessarily cut-off chart
Krugman wants us to believe money supply and inflation are unrelated, at least in the US. And in a sense, he’s correct. We had varying changes to money supply with little signs of inflation since the 1990s:
But nothing like that has happened in the U.S., even during periods when monetary aggregates like M2 have increased dramatically. Anyone claiming that big increases in M2 presage surging inflation was wrong again and again since the 1980s. I mean really, really wrong
Here’s the chart Krugman shows as evidence:
Pop quiz: What is the right most date on the chart above?
A: 2021-Q1
B: 2020-Q4
C: The last date in which Krugman doesn’t have to explain an uncomfortable spike
Krugman purposely excludes the most recent money supply data. I know because I recreated the same chart from the same website with the default date range:
I could see why he wouldn’t want to include that. It sticks out and people may think, what is true for increasing the money supply < 10% a year may not be true if we increase the money supply by 25% in one year. Besides, when we did see money printing above 10% in the 70s, we saw uncomfortably high inflation.
Introduce a completely unrelated concept
Velocity of money sounds relevant to inflation because it sounds like how much money moves around. If it moves around a lot, that means things are heating up. I’m spending a lot and then in turn you’re spending a lot. It could be a problem. But as Krugman points out velocity of money is actually low:
But when interest rates are very low — which they have been for years, basically because there’s a glut of savings relative to perceived investment opportunities — money is, at the margin, just another asset. When the Fed increases the money supply, people don’t feel any urgent need to put that cash to more lucrative uses, they just sit on it. The money supply goes up, but G.D.P. doesn’t, so the “velocity” of money — the ratio of G.D.P. to the money supply — plunges:
Velocity of money is GDP divided by M2 money supply. Our GDP went down due to the covid lockdowns, and our M2 money supply went up a lot due to an overzealous Federal Reserve.
To recap, GDP is low (numerator), money supply is high (denominator) so velocity is very low.
When rates are low people don’t just sit on the cash as Krugman suggests. They invest it. Which explains why the stock market is up 30% from pre-covid levels. This doesn’t show up in GDP. This was less true during the 1970s period of inflation since financial assets were less available to most Americans. Now nearly 50% of Americans own stock.
Velocity of money has nothing to do with inflation, apart from sharing a variable that does have a lot to do with inflation when sufficiently high: money supply.
Here’s velocity of money compared to CPI, a chart curiously absent from Krugman’s article:
There were times when velocity was high and inflation was high and vice versa.
The Krugman approach is:
If I want to show two fields as being unrelated, show them on the same chart
If I want to show two fields as being related, state that they are related and show only one of them on a chart
Don’t believe me? Here’s the St. Louis Fed on the relationship between velocity of money and inflation:
Eyeballing the graph, we see no clear relationship between these variables… Not much of a relationship can be found here. If anything, there is a slight upward slope, indicating that higher M2 velocity is associated with higher inflation, although this would not be statistically significant.
Final Thoughts
Krugman is not an economist. At least he’s not an economist when he’s writing for the NY Times. He’s a political pundit more interested in dunking on his opponents, which now apparently includes “monetary cockroaches”.
He doesn’t even work off, let alone mention the facts. In the last year money supply has grown ~25%, more than double anything we’ve ever seen in the US. And asset prices are up 30% from pre-pandemic levels. Despite prefixed with “Krugman Wonks Out”, this article is anything but wonky. This is unfortunate, because we need more credible voices on this topic.
In the mean-time, I’ll keep looking for reasons why an unprecedented increase in money supply will have no negative market distortions.