Could hyperinflation become the new normal?

A few months ago, when prices began to spike throughout the U.S. economy, Americans were told not to worry, it was just a temporary blip.

On several occasions, President BidenJoe BidenManchin to vote to nix Biden's vaccine mandate for larger businesses Congress averts shutdown after vaccine mandate fight Senate cuts deal to clear government funding bill MORE and high-ranking officials in his administration claimed the current bout of inflation was “transitory” and would subside sooner rather than later.

Yet, as the months tick by, inflation is getting worse, not better.

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In October, the rate of inflation, as measured by the consumer price index, reached a 30-year high of 6.2 percent.

Unfortunately, the rate of inflation is likely to remain on an upward trend, based on current fiscal and past monetary policies.

Monetary policy in the United States comes under the bailiwick of the Federal Reserve.

According to the Federal Reserve’s website, “Monetary policy in the United States comprises the Federal Reserve's actions and communications to promote maximum employment, stable prices, and moderate long-term interest rates.”

Based on its recent actions, the Federal Reserve has failed in all three spheres.

First, consider the Fed’s balance sheet.

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In 2008, the Federal Reserve’s assets totaled less than $1 trillion. By 2019, it had risen to about $4 trillion. As of November 2021, it has ballooned to almost $9 trillion.

Second, the Federal Reserve’s money supply, known as M2, has also increased by leaps and bounds in recent years.

In 2008, the U.S. money supply stood at $7.5 trillion. By 2019, it had more than doubled. As of this writing, it has increased to $21 trillion.

For more than a decade, the Federal Reserve has unleashed trillions of dollars into the U.S. economy. During that period, it has also maintained ultra-low interest rates, which has led to huge distortions in the economy.

This has also created gigantic asset bubbles in housing and equities. Because interest rates have remained near zero for years, anyone seeking a decent return on investment has turned to the stock market, which is at all-time highs, instead of savings accounts or certificates of deposit.

In short, over the past decade the Federal Reserve has created an inflationary environment by printing trillions of dollars, thereby increasing the money supply, while refusing to raise interest rates.

Make no mistake, the more dollars the Federal Reserve puts in circulation, the less each dollar is worth. Hence, monetary policy has set the stage for rampant, long-term inflation.

But monetary policy is only half of the inflation story. We would be remiss to ignore the other side of the coin: fiscal policy.

In general, fiscal policy refers to how governments use spending and taxation to influence the economy at large.

Since COVID-19 hit U.S. shores in 2020, the federal government has abandoned any vestiges of sane fiscal policy.

To date, the federal government has allocated nearly $5 trillion in COVID-19 relief efforts. This includes a plethora of cash giveaways, such as multiple rounds of stimulus checks, enhanced unemployment benefits and increased food stamps.

On top of this, the Biden administration recently passed a $1.2 trillion infrastructure bill and is on the verge of passing a $1.9 trillion budget reconciliation package.

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Not to be overlooked, the Biden administration is also determined to implement huge new tax hikes under its Build Back Better bill.

Making matters worse, the administration terminated the Keystone XL pipeline and stopped all new oil and gas leases on federal lands, which has caused the cost of energy to skyrocket. Because energy is a key component in nearly all economic activity, the administration’s energy policy is adding more inflationary pressure to the equation.

The U.S. economy is in a precarious position. Due to the Federal Reserve’s decade-long money printing spree, the economy is flush with too much cash. Although much of that cash has been diverted into housing and the stock market, this has created dangerous bubbles that could pop in the near future.

If, or more likely when, that bubble bursts, the U.S. economy will be severely crippled. Yet, at the same time, the Federal Reserve will have little, if anything, that it could do to staunch the bleeding. The same applies to the federal government’s fiscal response to a future economic calamity.

This begs the question: Is hyperinflation on the horizon?

Chris Talgo (ctalgo@heartland.org) is senior editor at The Heartland Institute.