Monetarism, Energy, and Your Buying Power

What if the size of the paper dollar was adjusted each year to reflect negative changes in consumer buying power, i.e., inflation? Over time, at some point your dollar would be the size of a postage stamp, albeit while still shrinking, barring a burst of deflation. Compared to a year ago, your dollar is 8.6% smaller.

Keep in mind, even before the current run-up, annual inflation was averaging between one to two percent per year, low but still draining your buying power. Now inflation is front and center as a ballot issue and “blame game finger pointing” is beating pickleball as a political back and forth obsession . The Nobel prize winning economist, Milton Friedman (1912-20o6), put monetarism in the forefront as the root cause of inflation when he stated, “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” 

As noted in a previous column, from 2021 and leading into 2022 in response to Federal Reserve Bank easy money policies and unparalleled government peacetime spending during Covid, the money supply soared and shut-in consumers sat on funds as the personal savings rate hit all-time highs. Once the economy opened up, wallets and purses did also, and demand for many goods and services surged. Inflation took off, especially in energy markets, the lifeblood of what “makes the wheels go round” in the economy, literally. Per the Bureau of Labor Statistics, in May, 2022, American energy inflation accelerated to 34.6%, the most since September, 2005. Of this, 48.7% of the surge was due to gasoline. Fuel oil rose 106.7%, the largest increase on record, and natural gas rose 30.2%, the most since July, 2008. For those touting electric cars, electricity rose 12%, the largest year over year increase since August, 2006. Currently, only about 20% of American electricity is generated from renewable sources; 80% still comes primarily from coal and natural gas, with some nuclear.

Yes, there are other complications in the mix, including the war in Ukraine and supply chain snafus. But the supply chain still depends on gasoline, diesel, bunker fuel for ships, and aviation fuel for transportation, and soaring fuel expenses feed into the costs of goods and services. United Airlines recently gave pilots a 14.5% wage boost and that sets off “us too” demands from workers across the board. Too much money chasing shrinking energy supplies pushes up other prices, plain and simple.

On June 26, 2022, a leading Democrat, former Tennessee Congressman Harold Ford, Jr., “spoke truth to power” when he wrote in an op-ed in The Wall Street Journal, “A Biden Retreat Could Lower Gas Prices.” In order to make green energy options more attractive, the Biden administration purposely worked to make American fossil fuel energy production less robust and more expensive. As Mr. Ford noted, “The U.S. is blessed with an abundance of oil, natural gas and coal that helped us win World War II and gave our citizens the highest living standards in the world.” Now, with gas prices creating sticker shock at the pump, said Ford, “Mr. Biden can lead the nation out of this self-imposed energy crisis by returning to the policies favored by his predecessors and many in our party.”

Dashing hopes that Middle Eastern producers can fill the void, at the June G-7 meeting in Germany, French President Macron told Joe Biden that Saudi Arabia and the UAE, two top OPEC producers, can barely increase oil production. That places the Biden administration between a rock and a hard place. Only America has the reserves and the capability to substantially increase global oil and energy output over time, including coal and nuclear. The possibility of increased supply will bring prices down. So the question lingers. What will the administration do?

The question is important to investors. Only two variables realistically are in play. Either demand for fossil fuels decreases due to a severe American and global recession, or the supply increases. A move to increase the supply of American fuels on global markets would generate work for Americans and help ease pressures on the working class middle, while also spurring profits for U.S. companies. This would be a boon for stock market values, helping individual and institutional investors, including retirees that count on dividend distributions and stock values to offset inflationary erosion of investments like bank deposits. It may take a threatened or actual red election wave. We shall have to wait and see and continue to read the tea leaves for clues.