The lag effect of monetary policy changes will surprise the Fed as the fiscal “pig” of stimulus begins to exit the economic “python.”
For those unfamiliar with the term “pig in a python,” it refers to when a python consumes its prey. It does so by swallowing it whole, in this case, a pig. The American-English definition of “pig in a python” became an analogy for the demographic bulge in the U.S.
– the people who were born during the ‘baby boom’ of the years immediately following the Second World War (1939-45), considered as a demographic bulge;
– any short-term increase or notably large group.
We can apply that analogy to the massive fiscal and monetary stimulus injected into the “economic python” in 2020-21. As discussed previously,those massive monetary and fiscal inputs were the root cause of the current inflationary spike. To wit:
“As Milton Friedman once stated, corporations don’t cause inflation; governments create inflation by printing money. There was no better example of this than the massive Government interventions in 2020 and 2021 that sent subsequent rounds of checks to households (creating demand) when an economic shutdown constrained supply due to the pandemic.
The following economic illustration shows such taught in every “Econ 101” class. Unsurprisingly, inflation is the consequence if supply is restricted and demand increases by providing “stimulus” checks.”
The massive surge in stimulus sent directly to households resulted in an unprecedented spike in “savings,” creating artificial demand. As shown, the “pig in the python” effect is evident. Over the next two years, that “bulge” of excess liquidity will revert to the previous growth trend. Economic growth will lag the reversion in savings by about 12 months. This “lag effect” is critical to monetary policy outcomes.