Is Inflation Transitory or Here to Stay?
Why Might It Be Transitory?
The Federal Reserve’s transitory theory is that the Covid virus caused massive shutdowns and dislocations. Then, when economies reopened, there was an enormous increase in demand. However, the previous year’s shutdown hindered the supply of goods.
The problem for the Fed is that, as price increases continue or worsen and last longer, their previous time frame of transitory gets pushed out.
My Professional Designations
Financial advisors who hold the AIF® designation have:
- Completed the AIF® Designation Training;
- Passed the AIF® designation exam;
- Met the designation’s prerequisites and qualification and conduct standards;
- Accrued a minimum of six hours of continuing professional education, with at least four hours coming from fi360-produced sources;
- Attested to a code of ethics.
Financial professionals who hold the CRPS® designation have:
- Completed a course of study encompassing design, installation, maintenance and administration of retirement plans;
- Passed an end-of-course examination that tests their ability to synthesize complex concepts and to apply theoretical principles to life situations;
- Pledged adherence to the CRPS® Standards of Professional Conduct, and are subject to a disciplinary process in that regard.
CRPS® designees renew their designation every two years by completing 16 hours of continuing education, reaffirming adherence to the Standards of Professional Conduct, and complying with self-disclosure requirements.
Financial Advisor who hold the AWMA® designation have:
- Completed a course of study encompassing wealth strategies, equity-based compensation plans, tax-reduction alternatives, and asset-protection alternatives;
- Passed an end-of-course examination that tests their ability to synthesize complex concepts and apply theoretical concepts to real-life situations;
- Agreed to adhere to the AWMA® Standards of Professional Conduct, and are subject to a disciplinary process in that regard.
AWMA® designees renew their designation every two years by completing 16 hours of continuing education, reaffirming adherence to the Standards of Professional Conduct, and complying with self-disclosure requirements.
CFS designation is awarded upon passing an examination on mutual funds, ETFs, REIT's, closed-end funds, and similar investments.
Advanced studies on topics include:
- Fund analysis and selection;
- Asset Allocation;
- Portfolio Construction
- Sophisticated investment strategies for risk management, taxes, and estate planning.
San Diego, CA, November 13, 2020 – The Institute of Business & Finance (IBF) recently awarded Tim Hayes with the only nationally recognized tax designation, CTS™ (Certified Tax Specialist™). This graduate-level designation is conferred upon candidates who complete an 135+ hour educational program focusing on personal income taxes and methods to reduce tax liability. The combined top state and federal bracket can easily exceed 40%.
San Diego, CA, September 1, 2020 – The Institute of Business & Finance (IBF) recently awarded Tim Hayes with the estate planning designation, CES™ (Certified Estate and Trust Specialist™).
This graduate-level designation is conferred upon candidates who complete a 135+ hour educational program focusing on trusts, wills, probate, retirement benefits, caring for children, and what should be done after the death of a loved one. Over $50 trillion is expected to pass from one generation to another during the next half-century.
The Accredited Portfolio Management AdvisorSM, or APMA® program, is a designation program for financial professionals. The program educates advisors on the finer points of portfolio creation, augmentation, and maintenance. Students will gain hands-on practice in analyzing investment policy statements, building portfolios, and making asset allocation decisions.
San Diego, CA, May 12, 2020 – The Institute of Business & Finance (IBF) recently awarded Timothy Hayes with the only nationally recognized annuity designation, CAS® (Certified Annuity Specialist®).
This graduate-level designation is conferred upon candidates who complete a 135+ hour educational program focusing on fixed-rate and variable annuities. Several trillion dollars are invested in annuities; it is estimated that at least one-third of all annuity contracts are not titled correctly.
What About All this Government Spending?
In March 2020, the government passed the $2.2 trillion CARES Act. In April, $484 billion was approved to fund the Paycheck Protection Program. Finally, in August, the Consolidate Appropriations Act, 2021, passed, providing $900 billion.
In March of 2021, newly elected President Biden signed into law an additional $1.9 trillion, bringing total government expenditures on Covid relief to roughly $5 trillion, an astonishing 25 percent of GDP spent.
Where Does New Money Come From?
You might be surprised that government spending usually has little impact on the supply of money. This is because the government gets its money by taxing. If its spending is higher than its revenue received through taxation, it sells bonds to make up that difference. Either way, the money the government gets that it redistributes was already in the economy.
Most new money in a capitalist economy comes when a non-government entity, a commercial bank, makes a loan. In that case, it credits the loan applicant with a new deposit offset by a new liability on the loan. As a result, the bank customer is free to spend that money. Because that new deposit was not drawn from someone else’s bank account, it is new money.
Enter Quantitative Easing
The difference with this recent massive increase in government spending is that most of it was offset when the government’s bank, the Federal Reserve, bought it.
The government sells the bonds to primary dealers in an auction. The primary dealers either keep those bonds or sell them to pension plans, individual investors, mutual funds, etc.
Again, this process has no impact on the supply of money. The bank account drafts of the primary dealers or buyers of the bonds are entirely offset by the credits in the bank accounts of the recipients of the government spending.
However, if the government tried to sell $5 trillion of new bonds in the middle of an epidemic-fueled recession, it might have had to offer a higher interest rate on those bonds, which could increase the rate on other bonds—something they wanted to avoid.
To reduce the likelihood of that outcome, the Federal Reserve promised to buy those bonds from either a primary dealer or the entity that bought them from the primary dealer.
Read More: Investing in an Overpriced Stock Market
Here Is Where It Gets Complicated
When the Federal Reserve buys a bond from a noncommercial bank like a primary dealer, a pension plan, or a mutual fund, it credits that entity with new money called reserves. That bank then credits the bond seller with a new deposit. That new deposit is considered new money as nobody’s bank account is reduced by an equal amount. The same process occurs when making a loan.
Is the Fed’s bond-buying the inflation culprit? Probably not. If it is playing a part, it is indirect. Most of the new money created by commercial banks probably went back into financial assets like stocks and bonds, which helped push up their prices. In a process called the wealth effect, owners of those assets might use their increased wealth to buy non-financial assets like houses, paintings, and cars, but this probably will not push up the price of food, gas, or other commodities.
Read More: Financial Planning for Retirees
These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
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