The Federal Reserve’s balance sheet went up “only” $82.8 billion in the last reported week.  This would have been considered unprecedented two months ago. But after seeing the balance sheet going up over $500 billion per week a couple of times, $82 billion seems mild.

For context, the balance sheet did jump extraordinarily after the financial crisis hit in late 2008, although never at $500 billion per week.  During QE3 that lasted until 2014, the Fed was certainly not creating anything close to $82 billion per week.

Here is the FOMC statement from September 2013.  It says the Fed will continue to buy $40 billion per month in mortgage-backed securities and $45 billion per month in Treasury securities.  So the Fed was creating $95 billion per month. Compare this to the recent $82 billion in one week, which was a great improvement from previous weeks.

Better yet, compare that to the past two months where the Fed has increased its balance sheet by well over $2 trillion.

In other words, the Fed has been massively inflating for the last two months.  But the rate of creating money out of thin air has decelerated now.  The balance sheet is still going up significantly, but at a slower pace than before.  I expect this will continue for a little while.

Meanwhile, I can speak anecdotally about food prices.  I know there has been talk of a meat shortage, so maybe this is not a fair example.  But it is still a valid example of how we are already paying higher prices for certain things.

I went to the grocery store the other day.  I bought some chicken.  The store was limiting purchases of chicken to two items.  So this already indicates a shortage.  But on top of this, prices had gone up significantly.  I can’t give an exact percentage because prices are based on weight.  I don’t typically look at how much it is per pound.  However, based on my experience, I am guessing the price went up by about 50% as compared to a couple of weeks ago.

So there is temporary hyperinflation in chicken.  I consider a 50% increase in prices in less than two weeks to be hyperinflation. If general prices were behaving in this manner, it would be hyperinflation.

I hope the rise in price is temporary, or that at least it will stop going up for a while.  It is a supply and demand issue.  More people are buying at grocery stores instead of eating at restaurants.  Due to regulations (of course) and the difficulty in switching where production goes, supplies at the grocery store are not meeting the new increased demand. There is also a question of whether supplies will be maintained, as some food producers have had temporary (hopefully) closures.

It makes sense that prices would rise.  I would prefer to have the option of paying a higher price than not having it available at all.

Monetary Impacts on Prices

Still, at what point does this also become a monetary phenomenon?  There are more dollars chasing the goods and services in existence.  If anything, there are fewer goods and services in existence.

It is difficult to say if we will have imminent price inflation.  There is a lot of fear out there, and I think this fear will continue.  It means people will tend to buy fewer things.  This is deflationary.

On the other hand, the government is spending money like crazy, and it is all coming from debt monetization by the Fed.  The only way the federal government is able to run a massive deficit is because the Fed is willing and able to buy that debt.  It buys the debt by creating money (mostly digital) out of thin air.

People are getting their $1,200 (or however much) stimulus checks.  Unemployed people are starting to get their “benefits”, which includes $600 per week from the federal government.

Imagine someone working as a hair stylist.  You don’t spend money on a hair stylist because you are not allowed to (per the government).  Therefore, you have some extra money from not going to the hair stylist.  But the hair stylist is still getting income in the form of government payments.  Maybe this replaces what you and other customers would have paid.

So you and other customers have extra money from not going to the hair stylist this month.  The hair stylist has income from the government (maybe more than before).  The extra $600 per week came courtesy of the federal government, which is really courtesy of the Fed.  So there is no question that there is extra money floating around out there.

I don’t think there is any question that at least some prices are going to go significantly higher.  Real wages are going down, and they will probably stay well below where they were in February for a long time to come.

Life is going to get even more expensive.  The lockdowns certainly didn’t help.  But even when the lockdowns are over (hopefully at some point), there will have been great damage done by the reckless spending and monetary inflation.

This will have to proliferate in the form of lower real wages.  There is no free lunch.  I don’t know if nominal wages will stay down or if the inflationary pressures will push them up.  Either way, life will be more expensive.  If nominal wages go up, prices for goods and services will go up that much more.

I expect the changes in price levels will vary greatly depending on the product or service. Food prices are going to continue to go higher.  Everyone has to eat, so it is hard to reduce demand much in this category. Maybe some will eat more inexpensive foods than before, but the overall demand will still be there.

I expect most asset prices to decline.  I am less clear on real estate.  I think real estate prices will most certainly decline in the short term. If people expect high price inflation, then some may move back into real estate as a form of wealth protection.

Again, I don’t know how this whole thing will play out, but I am certain that real wages will go down.  I expect that price inflation will rise significantly at least in certain sectors.  It may take a little time to play out.

The name of the game right now is income preservation and wealth preservation.  A few people may come out of this whole thing ahead, but it will be a small fraction of the population.