In an interview with the Wall Street Journal, Treasury secretary Janet Yellen admitted that the chain of stimulus plans implemented by the US administration helped create the problem of inflation. “Inflation is a matter of demand and supply, and the spending that was undertaken in the American Rescue Plan did feed demand,” Yellen admitted. Of course, Yellen went on to say that the spending was appropriate due to the collapse of the economy as governments were trying to prevent a recession.
This reminds us of a few of the problems of disproportionate government intervention and the negative impact on the middle class. The misguided massive lockdowns were imposed by the government. Countries that had strict testing, like South Korea and other Asian and European countries, kept the economy working and the pandemic under control. However, the problem is larger and deeper. Central banks and governments have exhausted all demand-side policies at the expense of the middle class by eroding real wages and deposit savings.
Even worse, governments created a larger inflationary spiral by maintaining all “pandemic relief” packages even after the reopening, well beyond the recovery. They expected a spectacular aggregate demand increase and they got it. Now the result is higher inflation and lower economic growth. But government size and deficit spending remain.
Everything that government spends is paid by you. There is no free money. Even for the recipients of benefits in constantly depreciated currency. Inflation, the tax on the poor.
Governments do not avoid recessions through spending, they simply make the accumulated problems larger by constantly adding debt that central banks monetize via quantitative easing. This uncontrolled increase in M3 money supply (a broad money proxy) leads to asset inflation first and everyday goods price inflation afterwards. Both consequences lead to inequality and a constant deterioration of the purchasing power of the currency, making salaries in real terms lower.