This whole inflation episode has two competing narratives. Only one can win. It is looking more and more like “Team Transitory/Real Economy” is going to crush “Team Money Printing/Fed-Uber-Alles.” The PCE inflation, consumption, and GDP numbers all point in that direction.
- “Team Transitory/Real Economy” thinks inflation came from real-world supply chain problems meeting the fading end of a huge wave of “checks in the mail” fiscal stimulus. We can’t use the word “transitory” in polite company anymore, but the idea was that inflation was a situational thing that would fade as the economy normalized. That took about a year longer than people thought in 2021. Also Russia/Ukraine didn’t help. But it looks to be happening now.
- “Team Money Printing/Fed-Uber-Alles” thinks inflation came from excess money printing. They put a huge amount of emphasis on the Fed and “liquidity” and the “Finance Economy.” The Real Economy is assumed to be a sort of a side-car along for the ride. They have been issuing dire warnings that unemployment “must” go up to 5%-6% to slay the inflation beast our profligate money printing has awoken from the depths.
Team Money printing has a bigger megaphone because it skews towards the interests of the rich. It also has a simpler story “kitchen table economics” story to tell that resonates. “If we print all this money it MUST create inflation because….”
Team Transitory has a smaller megaphone because it skews towards the average person on the street and the real-world economy. Which everyone pretends to care about but the whole point of being rich is to get away from the “average” and enjoy that little flutter of pleasure as the Economy class files past you in the seats up front (there’s a reason the board First Class first…).
Team transitory also has a more complicated story to tell. You see, all that money printing just went into bank reserves and Money Market funds which were just parked right back in the Fed and never spurred any real-world lending so… (eyes glaze over here).
Team Transitory is, however, looking more right every day.
Team Monetary will likely try really hard to change the subject as their feet slip towards that tug-of-war “loser” boundary line… For example, the false narrative that the 2008 Real Estate crisis was caused by “Fannie Mae and the government pushing affordable housing” not wildly irresponsible private sector lending to all segments of the population.
Because they have a bigger megaphone, the “Monetary” narrative will probably skew the picture. The Fed’s role and scope for action will continue to be over-emphasized. The extraordinary effectiveness of fiscal stimulus will be buried. Exactly because it was so effective. But the story is wearing thinner with every economic cycle.