Aug. 30, 2022

Why Inflation? Answer: 4, 16, 20

The key to understanding where this country is financially is in four digits: 4, 16, 20. Once you firmly grasp their profound effect, all the rest of the debate over the economy will come into focus.

Those four numbers, 4, 16, and 20, represent our nation's money supply, measured by its most basic level: M1. Simply put, it is how much cash, or equivalent, like travelers' checks and demand deposits, are in the system.

Before the Covid Pandemic struck in February of 2020, the nation had $4 Trillion in M1 Money. It had taken the country over two centuries to achieve this level of cash. And despite wars, inflation, and famine, the Federal Reserve and US Treasury Department maintained a steady growth rate in M1 Money.

There is an inextricable relationship between the supply of Money and prices or inflation. That should come as no surprise. After all, the Federal Reserve's mandate from Congress is to maintain stable prices. So it is natural to assume they would conservatively manage the money supply.

Throughout history, those countries that cannot control the growth of their money supply have suffered the devastation of runaway inflation. Today there are two countries: Turkey and Argentina, that have inflation rates of over 70%. And the reason is simple: they allowed their Currency's growth to get out of hand.

So, back to this country.

 

 

As we said in February of 2020, the US Money Supply stood at $4 trillion at the beginning of the Pandemic. Then something inexplicable happened: this Administration and the Federal Reserve started pumping Money into the financial system. In just a couple of months, Treasury and the Fed added $12 trillion. They were effectively expanding our money supply by 400%.

Suddenly, instead of just $4 Trillion in cash, we now had $16 Trillion in Money. We had $4 chasing the same amount of goods and services. The standard definition of inflation is too many dollars chasing too few products, and we were there four times over.

In theory, each dollar would not be worth just 1/4th what it was. Or viewed another way, we should expect 400% inflation after that increase in M1 Money.

We haven't had 400% inflation due to the dampening effect of some other forms of "money" in the system. Money funds, time deposits, and other forms of "near cash."

But after that kind of reckless money printing, perhaps we should have expected an inflation rate close to Turkey or Argentina, around 70%.

What makes this all so unbelievable is that almost no one today seems to remember that we've done this. Jerome Powell didn't mention it in his most recent Jackson Hole, Wyoming speech, where he discussed the Fed's willingness to fight inflation but failed to utter a word about its origin.

President Biden has been mute on this subject. Biden wants to let the "good times" roll, and he continues spending and spending. Witness his waving of the Student Loans.

No one in Washington will ever acknowledge that our inflation problem began with their money printing.

So we began with $4 trillion when 2020 began, and we ended that year with $16 trillion. What came next?

If you're like me, you probably assumed that once they were through pumping dollars into the system after the Pandemic, they were through. But the pumping has continued, although not at the rate as before. In the 20 months since the end of 2020, Washington has added another $4 trillion. These are dollars created out of thin air. As if "dropped from a helicopter," to use former Fed Chair Ben Bernanke's colorful phrase.

More Money, creating more inflation. It's not such a difficult concept. And yet, we'll likely never hear this from anyone in Washington.

The point is, despite all the rhetoric, Washington read the Fed and Treasury are continuing to inflate at an incredible rate. We've gone from $4 Trillion at the beginning of 2020, $16 Trillion at the end of 2020, and $20 Trillion today. 4, 16, 20.

They have inflated the primary money supply by 500% in just 25 months.

So the next time someone asks you why there's so much inflation? Just remember 4, 16, 20.

 

Economic News

 

Two major European economies are reporting inflation this morning. Both headed in the opposite direction, based almost entirely on the price of fuel. Spain reported a lower annual inflation rate, driven almost entirely by those lower fuel costs. While Germany, which continues to endure higher and higher energy costs, saw their inflation rise to the level they were in May. Little relief for Germany.

Consumer Sentiment in the European Union continues to slide; Euro Area sentiment declined for the 10th month.

We will soon see the latest Case Shiller Report on Home Prices here in the US. This reading has been above a 20% annual increase in home prices for four months in a row.

And then comes the JOTLS Report on Job openings. This report will be for July, and in the second month, this report is expected to show fewer than 11 million open jobs available.

In earnings reported so far this morning. Positive results from the Bank of Montreal, and Baidu, China's largest internet search engine. Also, positive results from an American electronics retailer, Best Buy.

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