Guess What Happened The Last Two Times Government Spending Unleashed Inflation?
The comments below are an edited and abridged synopsis of an article by Phoenix Capital Research
Two things stand out in the markets at the moment: Inflation is deeply embedded in the financial system, to the point that distributors/retailers are hiking prices outright (the third and final phase for an inflationary breakout); and the Fed has got blinders on to this development, claiming that the inflationary trend is ‘transitory’ and nothing to worry about.
As investors, we must ask, “What does this mean for the markets?”
History provides some clues here. First, we need to acknowledge what is causing today’s inflation, and the answer is money printing; specifically, government stimulus.
It’s true that the Fed helped create this inflationary storm by printing over $3 trillion between March and June 2020, but since June 2020, the pace of Fed money printing has slowed.
Yes, the Fed has printed $3+ trillion. But the Biden Administration has asked for $5 trillion via its stimulus programs, and it wants to spend another $2.25 trillion for infrastructure, $2 trillion on climate change, $1.8 trillion for social spending via the American Families Plan, and more. That means another $5+ trillion in spending.
While the Fed has played a big part in money printing, the bulk of the spending/money printing and its subsequent inflation came from the federal government.
Stocks love the initial burst in government spending. But the subsequent inflation soon erases those gains.