The Remarkable One-Dimensional Thinking of the Former President of the New York Federal Reserve Bank

Bill Dudley, former president of the New York Federal Reserve Bank, writes in a column at Bloomberg:

[I]nflation is a slow-moving process. The economy would have to run hot for a long time to push inflation significantly higher. Consider what it took to generate the double-digit inflation of the late 1970s: First the guns-and-butter spending of the Vietnam War and Lyndon Johnson’s Great Society program, then the Nixon administration’s wage and price controls, then two big oil-price shocks.

This is what the members of the Federal Reserve are thinking.

But this is extremely shallow one-dimensional thinking.

Between 1960 and 1982, M2 money supply growth never climbed at an annual rate of more than 13.5% (see chart below).

                                                 M2 Money Supply Annualized Growth 1960 to 1982

But since May of last year, the money supply has been increasing at a rate of 20% plus and indeed is now at over 25% growth (see chart below). This is nearly a 100% increase in the growth rate compared to the peak growth in the 1970s.

M2 Money Supply Annualized Growth 1960 to Present

What is going on now is a far greater extreme than what occurred in the 1970s. To simply overlay the 1970s over the current period and to think the same slow-developing price-inflation story will play out is remarkable blindness to what is really occurring at the present time.

The 1970s faced a flood of money supply growth, we are experiencing a tsunami.

-RW

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