Generally speaking, increasing money supply causes prices to rise. “Too many dollars chasing too few goods” is widely accepted as inflationary. So, after the enormous injections of money by the Fed since The Great Recession, why is there still so little inflation? A year ago, I wrote there are signs that inflation is breaking out. But, it didn’t.
While Trump’s tax cut last year massacred the budget deficit, perhaps for several years, it also had one positive impact — productivity growth has returned, reaching 1.4% in the third quarter. This may seem modest, but it is a huge improvement and is our single best protection against inflation. There is no guarantee this will continue, as the anecdotal information since then is mixed. However, since tax law has not changed, I am optimistic about continued productivity growth.
It is easy to get depressed watching “Bozo & Two Stooges” during the Shutdown Show, but please remember that the American economy is still chugging along rather nicely. While an increasing number of economists are predicting a mild recession NEXT YEAR, very few think it will be significant. As long as productivity growth continues, inflation will remain tame, and the Fed will remain tame, and life will stay GOOD!