The foundation for today’s inflation was laid many years ago by a central bank that reacted to every bout of serious economic and/or stock market weakness by pumping up the money supply, but it was in 2020 that ‘the rubber hit the road’ so to speak. As conveyed in an article by Steve Saville, this is what happened beginning in March of 2020:
1. The government shut down large sections of the economy in reaction to a pandemic. This was a heavy-handed, low-tech and short-sighted political decision that gave scant consideration to the collateral damage it would cause to both the economy and public health.
- Unfortunately, an economy isn’t like an engine that can be stopped and then restarted with no ill effects. On the contrary, many supply chains will be permanently broken when large sections of the economy are shut down. Establishing new supply chains often will take time (at least several months and perhaps even years), and in the interim there will be shortages.
2. The government-driven economic collapse prompted the Fed to create several trillion new dollars out of nothing, thus expanding the total US money supply by 40% in one year.
- This is the single most important contributor to the current inflation problem, and yet the Fed generally is portrayed as the solution to the problem rather than the primary cause of it.
3. To mitigate the extreme short-term hardship caused by its own actions, the government distributed to individuals and businesses a substantial portion of the new money created by the Fed.
- In effect, the government showered the population with money, and as a result the 2020 recession coincided with a rapid increase in personal income. Nothing like this had ever happened before.
Summing up the above, as part of a reaction to COVID-19 the government caused the supply of many goods to shrink, and at the same time the government teamed up with the Fed to engineer a large increase in the monetary demand for goods. This created an obvious “inflation” problem well before Russia invaded Ukraine.
The major inflation problem that existed prior to Russia’s invasion of Ukraine has since become worse but not due to the invasion itself but, rather, to the economic sanctions imposed against Russia which have added to the problem…by causing damage to supply chains and depriving the world of critical resources…
In summary, the current U.S. inflation problem was caused by the combination of:
- a huge increase in the U.S. money supply,
- U.S. government programs that effectively showered the population with money,
- supply disruptions caused by COVID-19-related lockdowns
- and additional supply disruptions caused by a raft of anti-Russia sanctions.
In conclusion, the inflation that has become the primary focus of U.S. policymakers is the result of domestic U.S. policy choices. Therefore, calling it “Putin’s price hike” is disingenuous to put it mildly.
You did a terrific job of summing that up, and clarifying the inflation problem is due to government policy.