There are two sides to every coin. Two sides to every argument. And two sides to our economy.
Right now, I'm looking at two charts. Each is so outlandish, that I never thought I would ever see something like this. At least not in America.
What they portray is something akin to a third-rate banana republic. You know one of those countries is run by an over-the-top dictator. Who really doesn't know what he's doing.
And certainly doesn't know anything about economics. Each of these charts more closely resembles the mad ramblings of a country gone off the rails.
The two charts are of our basic money supply. What economists label M1. The most common measure of money includes cash, and near cash. Things like time deposits can quickly be converted into cash. It's money as you and I most often think of money.
Now going into the Pandemic, in March of 2020, just a little over 2 years ago our M1 Money Supply stood at 4.3 trillion dollars. Enough money so you and I and everyone else could transact any transaction that we wanted. We could all buy and sell whatever struck our fancy, and there was plenty of money to pay for everything. In cash.
But then the lockdowns began, this was March April of 2020. We were all told to stay at home. Self-isolate. And unless we had an “essential” job, (whatever that was!) we didn't go to work. Small businesses closed.
And this economy simply ground to a halt. Falling by over 33% in that dreadful second quarter of 2020.
So Washington, both Presidents Trump, and Biden started handing out money. The first stimulus checks came from Trump, all the rest from Biden.
How much money do you ask? 16.4 trillion dollars when all is added up. We know because that's how much the money supply expanded. So in two short years, we blew up our basic money supply by 500%. From 4 plus trillion to 20 plus trillion.
And, surprise surprise, we've got a major "case" of inflation.
Don't tell Washington, but that's what happens when you print trillions and trillions of dollars!
But as we said at the beginning, there are two sides to every coin. Two sides to an argument. And two sides to this economy.
Washington can do a lot. And most of it's not good. But the other side of all this is you and I. The average American, actually makes the economy work. We work to earn a salary. And purchase the goods and services that make our world go around.
What are we doing right about now? You know the answer better than I do. We're moving to the sideline.
We're not going to play those games that Washington and the corporate elites want us to play. We're not spending like we used to. We're starting to look twice before we rush out and buy the latest technological do-dad. And now that inflation has hit, and hit hard, we may stop buying at all.
Now the reason I know all this is the other measure of money. It's called velocity. And it's a measure of how fast money changes hands.
In the go-go years before the 2008 recession, money would change hands over 11 times a year. That dollar in your pocket today, you'd spend, and then they'd spend, until it passed through almost a different hand every month that year.
That's real velocity. And it makes this economy hum. Think of 10 little shops and stores, getting that dollar, taking their profit, and passing it on. Our old economic engine was going a mile a minute, Back before the great financial recession of '08.
And ever since then things have just gotten worse. Our confidence in the future has been shattered. We're not sure what lies ahead. And so we hang on to those dollars. We don't want to let them go. I know I don't. I want to put a little aside, just for an emergency.
And so we've brought that velocity down to just a little over one. That's a ten-fold DECREASE. We're putting on the monetary brakes, and we're not letting up.
So let me tell you what I think all this means.
Stop pumping all that money into the system, and to a large measure, you will stop the inflation. Now it won't stop entirely because we've made some awfully bad trade decisions. We've stopped drilling for oil. And it looks like we have a drought in the Midwest.
But stop the money printing, and we'll have a lot less inflation, that's for sure.
But the second problem. And this is the big one. People have a loss of confidence. It's going to take a lot to bring back the American consumer.
Those storm clouds over in Ukraine aren't helping. Add to this that a lot of us are getting up there in age. And we've got a real problem on the demand side of this economy.
No matter how you slice it, we're in a world of hurt.
My most likely outcome is this. Assuming that the Fed and Treasury can regain some control over their money pumping. Then I think we will have a substantial reduction in inflation.
But don't celebrate yet. Because what's likely to happen then will be a complete fall off the cliff. Going from inflation right into deflation.
Remember that velocity?
This is exactly what happened in the late 1940s. As we came off the money printing of World War II. People just weren't ready to start spending again.
So velocity fell, and we found ourselves with an economy that was deflating. It would be 30 more years before we would hear the word inflation again.
Just remember there are two sides to everything.