Monthly Monetary Updates 2021
An archive of Professor Tim Congdon's Monthly Monetary Updates from the year 2021. In this archive you can find a link to his Monthly Note videos, the Money Notes (PDF) and also the slides used in the Monthly Notes (PDF).
December:
(No video was produced in December)
November: Does the Fed understand what it is doing?
This video takes a further look at the USA where inflation continues to rise – hitting 6.2% in the year to October, the highest reading in some 30 years. Professor Tim Congdon, chairman of the Institute of International Monetary Research, discusses the insights, or the lack thereof, of Dr Richard Clarida, one of the most important economists of the Fed. After predicting in June 2020 that the coronavirus would be disinflationary, Clarida insisted 16 months later that the current surge in inflation will prove to be “largely transitory”. His recent comments make no mention of the quantity of money, nor does he discuss asset prices or business surveys. If Clarida was right, business surveys would be pointing to expectations of lower price-raising intentions, similar to those seen in 2020, not 2021. They do not: neither manufacturing nor services offer any hint of a slow-down in price raising. Increases in commodity prices have slowed, but the effects of the surge earlier this year have yet to work through. 2022 is likely to see the peak of inflation. How will the Fed react when its inflation forecasting is proven to be wrong? They must restore the quantity of money.
October: Will inflation reach double digits?
Inflation is higher in all the world’s leading economies than it was at the start of 2020. Many people are asking how high it will go and how long it will last. Will it even reach double digits? The key to answering this question is to go back to the spring of 2020 and the response of governments and central bank to the coronavirus pandemic. Professor Congdon warned at the time that the huge surge in broad money growth which resulted from their policies would be inflationary and his predictions have proved to be correct. Nonetheless, the Institute’s stance has been very much a minority view, although some members of “Team transitory”, including the influential New York Times columnist Paul Krugman, who insisted that the upturn in inflation was just a blip, are beginning to ask if they were wrong. Unlike Krugman, the Institute’s analysis of inflation prospects is based on growth in the quantity of money and the velocity of circulation, a tried and tested approach. Business analyses are a useful backup to monetary analysis and they too suggest that price pressures remain very strong. There has also been a big surge in energy prices. Given that the desire to hold money balances is stable, this makes double-digit inflation in 2022 a real possibility. Looking ahead to 2022 and 2023, money growth between 1% and 5% would be essential if inflation is to fall back to target. At the time this video was produced, the figure for M3 is much higher. Higher inflation is also predicted in the UK and the Eurozone. The blame for this high inflation can be placed fairly and squarely on central bankers who ignore the quantity of money in their deliberations.
September: The rise in US inflation caused by excessive growth of money
This video once again looks at the USA where inflation is rising. The Institute forecast this would happen as far back as March 2020. This is because of the notice taken of the huge explosion in broad money growth during the coronavirus pandemic. The Institute’s forecast may have been accurate, but it was very much in a minority in making these predictions. The Federal Reserve consistently underestimated the inflation threat and even when this video was recorded, was predicting that inflation would fall back before the end of 2021, even though it admitted it would still be at 3.3%, well above the 2% target. There are many indicators which point to a much higher figure. Going into 2022, given the “long and variable lags” between surges in broad money growth and price increases, inflation is likely to be higher in 2022 compared with 2021. Supply bottlenecks cannot be blamed for this as inflation is not rising to anything like the same degree in, say, Japan. The reason for high inflation is the high level of broad money growth in 2020 and 2021.
August: Global inflation prospects in the rest of 2021 and 2022
This video looks at money growth trends in the six largest world economies plus Canada and Australia. In the USA, M3 growth has come down from the exception values reached in 2020 but still remains high by recent standards. China saw only a slight blip in 2020 and then a decline, with broad money growth nudging the lowest levels seen since China opened up since the 1970s. In the Eurozone, M3 growth rose significantly in 2020 but not to the same levels as in the USA but has now dropped to 5%. Japan saw a surge in broad money growth in 2020, but the annual rate of growth never reached double digits and the highest figures were more modest compared not just with the USA but also the Eurozone. India, rather like China, saw only a small blip in 2020, but nothing very dramatic. The UK saw broad money growth reach a higher maximum than the Eurozone but it too has seen the growth rate drop back to 5%. In summary, the upturns in broad money growth comparing the two years to June 2019 with the two years to June 2021 range from 24.7% in the USA to 2.3% in India. The USA will therefore see the worst inflation, with 5% - 10% inflation likely for the next two years. There is upward pressure elsewhere, although only small increases in inflation can be expected in China or India. Canada decided to end its asset purchases much earlier than the USA and will therefore have lower inflation. Australia began 2020 with very weak broad money growth, which resulted in the usual stimulus measures not pushing it to the same extreme levels as the USA, so inflation is not likely to rise as high.
July: The US inflation prospect in the rest of 2021 and 2022
This is a further look at the USA and its rising inflation. In particular, how long will inflation the current surge in inflation last? Given that broad money growth has increased more in the last two years than in any other two-year period since the Second World War, the Quantity Theory of Money strongly points to higher inflation. US policymakers do not want to hear about QTM and there are no mentions of money in the minutes of the Federal Open Market Committee. US households currently feel very wealthy, with house prices rising by over 15% per annum, so sales growth should be very strong while inventory levels are very low. This points a boom lasting into mid-2022. The growth in aggregate demand will outstrip demand but this means higher inflation, which is likely to accelerate in the rest of the year and even the most modest estimates hint strongly that it will remain above 5% during this period and into 2022.
Special Money Note July 2021
June: What does monetary analysis tell us about inflation prospects?
This video looks mainly at the USA and the likely impact of the recent high broad money growth on inflation. A year ago, the US Federal Open Market Committee predicted that it would take several years or the US economy to recover from the effects of the lockdowns, with disinflation or even deflation likely. The Institute took a very different view. Using the Quantity Theory of Money, it predicted that the very high evel of broad money growth seen at the time would prove inflationary and that in the USA, inflation could reach 5% or even 10%. In May 2021, consumer prices did indeed reach 5%. The debate now revolves around whether this inflation will be temporary or permanent. The FOMC predicts that by 2022-3, inflation will fall back to the 2% target. A money-based analysis points to US CPI remaining at the 5% - 10% level until the end of 2022. .In the Eurozone and the UK, a similar pattern of falling velocity of circulation and strong money growth in 2020-21 can be observed. Inflation of 5% or above looks likely in both these jurisdictions too. Business surveys point to an intensifying boom, which reinforce the arguments for rising inflation, although the FOMC does not expect it to rise any further.
May: Will the rise in US inflation be temporary, persistent or permanent?
In the year to April, consumer prices in the USA rose by 4.2%, which came as a great shock to many people. The reason for this is the high level of money growth since late 2019, especially in Spring 2020. The Institute correctly forecasted this inflationary surge, which has bene especially pronounced in the USA. Many other forecasters got it wrong, including the Federal Open Market Committee, which does not consider money. Professor Tim Congdon predicts that by the Autumn of 2021 inflation will rise above 5%., It is a classic inflation episode and how it develops depends in future trends in the quantity of money and how quickly the growth rate returns to the ideal of around 0.3% per month. Currently, the economy is booming but under this scenario, there may well be a recession in late 2022/early 2023. If high broad money growth continues (0.6% or 0.9% per month), high inflation, possibly in double digits, could persist on a scale unseen since the 1970s. Which scenario unfolds depends on the future actions of the Fed.
April: Will UK inflation exceed the top of the permitted 1% -3% range? And if so, why?
The UK registered a very high rate of monetary growth registered in the year from March 2020. Professor Tim Congdon, along with nine other members of the Shadow Monetary Policy Committee, wrote a letter to the Financial Times on 20th April urging the Bank of England to end its asset purchase programme to avoid stoking inflation. The UK suffered high inflation in the 1970s but the introduction of inflation targeting in 1992 saw a considerable moderation. The key factor in determining the level of inflation is the rate of growth of broad money. Professor Congdon warned in 2006 that excessive broad money growth would lead to above-target inflation. He was correct and hence the concern about the current level of broad money growth, which is much higher. Given that trend growth is lower than it was in the early 2000s, inflation is likely to rise to 3% - 6% in 2022 in 2022-23. The behaviour of asset prices and the labour shortages both strongly support this view.
March: The Biden fiscal package: how does it matter?
An article in the Financial Times on 17th March claimed that the US would recover more rapidly from the effects of 2020 coronavirus pandemic because of President Biden’s “Rescue Package”. Professor Tim Congdon considers its likely effect on money growth (via monetisation of enlarged budget deficits), nominal spending and prices in the US in 2021 and 2022. Keynesians claim that fiscal policy is the dominant influence on the business cycle and that enlarging the budget deficit stimulates economic activity. Checking 40 years of US data and comparing the output gap and fiscal policy shows that there is no correlation between the two. In particular, the Clinton presidency was characterised by a contractionary fiscal policy but above-trend growth in the economy, as was Obama’s second term. If deficits are financed by the banks as opposed to bond sales, this creates money. Broad money growth will therefore remain high in 2021, which will lead to buoyancy in asset prices. In conclusion, the fiscal package will stimulate the US economy by boosting money growth, but this will also lead to higher inflation.
February: Why didn't QE spark inflation in 2009 and what's different now?
Since March 2020, central banks have undertaken “Quantitative Easing” operations in a number of developed countries, leading to warnings that inflation will follow. Why did this not happen when QE was used in 2008-9? At that time, Liam Halligan claimed that inflation would follow. Professor Tim Congdon disputed this and he has been proven correct. It is vital, as he argues, to use the correct monetary measure. He explains why the monetary base and narrow money are not relevant to macroeconomic outcomes, whereas broad money (M3 or similar) is different because it includes all money balances and thus affects the course of future economic activity rather than being affected by it. Broad money was not growing in 2008-9, despite QE (Although the US monetary base did grow rapidly), so there was no surge in inflation. This contrasts with 2020-21 when broad money has grown rapidly. This is why the rate of inflation will increase.
January: Surging commodity prices and the "inflation vs deflation"debate
A big debate took place in economics in 2020 over whether the policy response to the pandemic of 2020 would be inflationary or deflationary. Professor Tim Congdon, observing the rapid acceleration of broad money growth, was convinced that in the medium term, it would be inflationary. Asset prices rose in the latter part of 2020 and this month’s video looks at commodity prices, which have seen an unprecedented surge in the last six months. There have been shortages of various items from semiconductors to shipping containers at a time when economies are reopening after lockdowns. Demand will strengthen and thus the rise in commodity prices will continue. Inflation will therefore increase. The Institute’s 2020 prediction of double-digit inflation contrasted with the views of a number of leading economists, who denied that inflation would follow with some predicting “terminal deflation.” They got it badly wrong because the standard macroeconomic model has no role for money in the determination of national income and prices. Unfortunately, fiscal and/or monetary stimuli are continuing in the USA, the Eurozone and the UK. These are totally unnecessary. The net result will be a big rise in inflation in late 2021 and on into 2022.