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Q & A: What was the cause of post-COVID inflation?

Inflation is caused by too much money chasing too few goods. Milton Friedman said that.

The Federal Reserve had bought $5 trillion of Treasuries in the decade leading up to the pandemic, but the money paid for these securities basically went into bank vaults so did not cause inflation. Money velocity stayed low. Then in 2021, Congress passed the American Rescue Plan act to spend $1.7 trillion on an economy that was already recovering at full tilt, and the Fed backed it up by printing money to support it. That was the kiss of death.

Deficit spending supported by money printing is basically helicopter money. That’s what Congress and the Fed sprinkled on the American economy in 2021, bestowing upon us inflation that reached 9.2% in 2022. What is scary is that by making the comment that rising inflation in 2021 would be transitory, chairman Powell of the Federal Reserve revealed that he did not know the cause of inflation.

If he does not know the cause, how will he know the remedy? Despite money supply having gone steeply negative, for instance, Powell continues raising rates. Negative money supply growth should by itself do the trick over time, according to Friedman. Chances are, therefore, that Powell is about to overdo it with rates, causing unnecessary economic pain for millions of Americans.


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