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Deficit spending and money printing

Deficit spending, where expenditures exceed revenue, is a widely recognized problem in the U.S.. In fiscal year 2023, which ended Sept. 30, the federal government spent $6.13 trillion and collected $4.44 trillion in revenue, resulting in a deficit of $1.7 trillion.

The trend has persisted into fiscal year 2024, with the federal budget deficit already surpassing $531 billion as of Jan. 31.

If the government increases spending without a corresponding increase in production, it can lead to demand-pull inflation. This occurs when the demand for goods and services exceeds supply, causing prices to rise.

Money printing can also cause inflation by increasing the amount of currency in circulation without a corresponding increase in goods and services. This excess money chases the same amount of products, leading to higher prices.

As part of its response to the economic fallout from the COVID-19 pandemic, the Fed implemented quantitative easing, which significantly increased the money supply.

To tame the subsequent inflation, the Fed has tightened monetary policy by raising interest rates and reducing its balance sheet.

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Housing

While Schiff pinpointed two critical inflationary factors, Waters' perspective on housing inflation is not without merit.

According to the Bureau of Labor Statistics, the U.S. consumer price index increased 3.1% in January 2024 compared to a year ago. The so-called core CPI, which excludes volatile food and energy prices, rose 3.9% over the last 12 months.

Notably, the report showed that the shelter index increased by 6.0% in January compared to the same month a year ago, accounting for “over two thirds of the total 12-month increase” in core CPI.

More specifically, rent of primary residence increased by 6.1% year over year, while owners’ equivalent rent of residences rose by 6.2%.

It's worth pointing out here that there is a lag in the Fed's measure of housing market inflation, which even Powell has acknowledged. While Fed data says rent prices have been steadily rising, other analyses may show that rents are moving the opposite way.

Regardless, Powell recognized the housing market’s difficulties, describing it as “in a very challenging situation.”

“You have this longer run housing shortage, but at the same time you’ve got a bunch of things that have to do with the pandemic, and the inflation and our response with higher rates,” he elaborated.

A recent Realtor.com analysis indicates a shortfall of 7.2 million homes in America's housing supply.

The debate over housing affordability and the severe home shortage has also captivated social media audiences. For instance, TikTok influencer Mikey Taylor suggested that an annual income of $200,000 is necessary to rent a 790-square-foot unit in Los Angeles.

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Jing Pan Investment Reporter

Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.

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