Sudden Money

Money stock (M1) rose a nose-bleeding 75% in the last 12 months, by far the highest increase on record (Chart 1).  Add Mr. Biden's upcoming $1.9 trillion and it will jump even higher to 122% !!   Throw in 0% interest rates from the Fed, and we are forced to ask: what are the consequences of all this Sudden Money?

 

 Chart 1

• A financial asset bubble, now in its last, blow-off stages characterized by mass participation of the gullible public - see GameStop, cryptos, obscure COVID treatment companies, etc.  Hucksters are having a field day, shamelessly promoting everything and anything that will catch the sucker's fancy.  Bitcoin (today at $48.000) now has a total value of almost $1 trillion, or an astonishing 14% of US money stock. Think about it... I mean really think about it (* see footnote).
  

•  Consumer inflation.  Food prices are already spiking,now 20% higher than May 2020 and 9% higher than pre-COVID levels (Chart 2). Industrial input commodities are likewise higher by 32% and 18% respectively (Chart 3).
  

 Chart 2 - Food Prices Rising Fast

 

Chart 3 - Industrial Input Prices Rising Fast

• The cost of servicing the rapidly expanding government US debt will rise steeply . Debt is currently at 127% of GDP,, on its way to approx. 135-140% with Mr. Biden's plan. Yields on 30 year bonds rose to 2% yesterday, up from a low of just under 1% last year (Chart 4).  As the Financial Times reported, "Larry Summers, who served as Bill Clinton’s Treasury secretary, warned last week that Biden’s plan might trigger “inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability”. (IMHO Mr. Summers is one of the most intellectually rigorous SecTreas in US history.)
  

 

Chart 4

 

 * Note: Today Bitcoin is at $48.000, putting its total market value at $912 billion Add the next two cryptos and their total value rises to approx. $1.2 trillion,  equivalent to 17% of US Dollar M1 money stock ($6.9 trillion).   Is this in the best interest of the US? Isn't this an egregious challenge to the primacy of the mighty US dollar as global reserve currency?   History is littered with the bones of fallen empires who debased and devalued their currencies: Athens (silver Drachma),  Rome (gold Aureus), Byzantium (gold solidus), Great Britain (Sterling), USSR (Ruble).