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Commentary
Central bank officials have reassured the public that the global inflation surge over the past nine months has been temporary and that inflation should return to pre-pandemic interest rates sometime in 2022 across developed economies. I’m continuing.
At the same time, the US Federal Reserve has begun to taper off government debt purchases (which should reduce the money supply), but the Bank of Canada has recently Finished Quantitative easing (banks buying government bonds and other assets to inject money into the economy) will gradually tighten this historic expansion episode of monetary policy.
In fact, central banks, including Bank of Canada Governor Tiff Macklem, said the recent surge in inflation was primarily related to COVID-related supply chain disruptions and huge government payments aimed at mitigating the effects of the blockade. I think it is due to the rapid increase in personal consumption. Business closure and unemployment. However, there are also long-term factors that central banks refuse to publicly approve.As outlined in my new study These factors, announced by the Fraser Institute, make developed countries, including the Canadian economy, more prone to inflation for the foreseeable future.
Simply put, inflation occurs when the demand for goods and services exceeds the economic capacity to meet that demand at existing price levels. And demand is still a function of the total money supply and the speed at which the money supply “rotates”, which economists call the “velocity of money”. To explain the concept, if the total money supply is equal to $ 100 and the total spending is equal to $ 200, the money supply is said to rotate twice. If the same $ 100 is associated with a $ 100 spending, the speed of money is equal to 1.
Within this framework, the slowdown in the growth of the money supply designed by the central bank (for example, when the Bank of Canada ends quantitative easing) slows the growth of overall demand (others are constant). It lowers the inflation rate. However, increasing the speed of money circulation may offset the impact of monetary tightening on inflation. Undoubtedly, the dramatic slowdown in the velocity of money has helped maintain relatively low inflation over the last three decades. As an example, the velocity of money in the United States in the first half of 2021 was about half of the average for the period 1991-2000.
The slowdown in the speed of money is partly a reflection of the relatively low interest rates over the last few decades. If interest rates are relatively low, households and businesses will be willing to keep their cash balances in their checking or savings accounts. The speed of money circulation also reflects inflation expectations. If inflation is expected to remain restrained, as in recent decades, households and businesses will have less incentive to use savings to stay ahead of expected price increases.
Given that real interest rates are likely to rise as central banks reverse their quantitative easing policies, and that households and businesses are more likely to expect faster inflation in light of the recent acceleration of inflation, money is increasing. Distribution speed may increase significantly in the future. Returning to near the average for the period 1991-2000, aggregate demand for goods and services will increase dramatically, even if the total money supply does not increase at all.
Of course, the accelerated turnover of the money supply does not have to be inflation if the economy’s ability to supply goods and services is sufficiently increased. Unfortunately, all developed countries will face serious constraints on capacity growth.aging population Tighter government regulations and higher taxes (to direct and pay for the transition from carbon fuels to “green energy” sources) curb labor productivity growth, while labor growth rates It means that it is stagnant.
Based on this scenario, all segments of Canada’s economy could soon face much higher interest rates than they did recently, if the fight against inflation is largely left to monetary policy. In this regard, policy makers should, among other things, improve the environment for business investment to help improve the supply side of the economy.
The views expressed in this article are those of the author and do not necessarily reflect the views of The Epoch Times.
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Steven Globerman is a resident student at the Fraser Institute.
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