When the government spends the savings of Main Street America like a group of drunken sailors and pirates, something is wrong with the system.
In The Wall Street Journal, Kevin Warsh, a former member of the Federal Reserve Board, encourages the Fed to continue to reduce the size of its balance sheet. He concludes:
The Fed’s policy regime matters, importantly, to the path of inflation. The Fed’s asset purchases significantly expanded the money supply. The high priests of central bank dogma might consider it blasphemy, but monetary policy has something to do with money. It’s hard to measure money, especially given changes in credit intermediation. And simple rules that track money with inflation are inadequate. But outsize changes in the monetary base and the quantity and velocity of money have an important bearing on the ultimate price level.
The surge in federal spending and concomitant central-bank asset purchases in 2021 and 2022 contributed to the harmful surge in inflation. The monetary base is up 60% since the pandemic. Another measure of money, M2, is up 36% in the past four years. The inflation surge over the same period—cumulatively about 22%—shouldn’t have been a surprise. The American people are still paying a high price for the central bank’s policy error.
The Fed shrank its balance sheet in the past few quarters, down 7 percentage points from its peak as a share of GDP. M2 is down about 3%. Lo and behold: less money printing, less inflation.
Price stability would be more easily achieved if the Fed continues to shrink its holdings. But Fed leaders have strongly signaled the opposite: that its asset holdings are approaching steady state. They argue that the fall in inflation can be traced to lower wage increases in a softer job market. In my view, irresponsible government spending and excessive money printing are largely to blame for triggering inflation in the first place.
Had the Fed recognized the inflation problem sooner, it wouldn’t have been forced to raise rates so high. Had the Fed’s asset holdings stayed smaller or shrunk faster, inflation wouldn’t have risen so high. Hardworking Americans wouldn’t now be suffering the twin indignities of high prices and higher credit costs.
A dollar four years ago can buy less than 80 cents of goods and services today. But a dollar in the stock market is worth about $1.80. Much of Wall Street applauds the Fed’s big balance sheet and monetary dominance in Washington. Households and businesses on Main Street have far less reason for enthusiasm.
Action Line: Government is supposed to be working for you, not pillaging your life’s savings. Click here to subscribe to my free monthly Survive & Thrive letter.
