Money is debt and debt is money. It wasn’t always thus, but it certainly has been since the US went off the gold standard back in FDR’s time (June 5, 1933). If you have any doubt, just look at the charts tracking debt and M2 money stock as a percentage of GDP.
The recent vertical rise in both is due to the Fed’s incessant printing (aka QE on steroids), but the trouble started earlier, when the Fed first began its QE operations to prevent a total collapse during the Great Debt Crisis of 2007-10.
M2 is now at 90% of US GDP, ie there is almost one dollar floating out there for each dollar of economic activity. That’s up from 50 cents per dollar of GDP in 2008, ie before the Fed started its QE.
Should we be worried? I’m not sure, but I really don’t like this “monetization” of the US economy. It somehow rings hollow to need all this “cash” sloshing around in order to produce a unit of GDP. It is, in my opinion, a very fundamental measure of structural inflation. Or, at least, of potential hyperinflation.
Think of the economy as a factory producing GDP dollars, using M2 dollars as an input. Well, today’s factory is using a lot more $M2s to produce $GDPs than in the past. Ditto for debt.
Can this be good? No, it can’t be. Sooner or later this money will find its way to the “real” economy where producers of goods and services will realize that dollars are worth less than before and thus demand to receive more for their products. As Milton Friedman said, inflation is always and everywhere a monetary issue.
You don’t believe it? Even in Rome around 260 AD inflation soared to 1000% since the gold content of the coinage was dropped to 5%. It had previously dropped from 100% to 90%, then 60%….
If we only have 100% inflation, I would say we are very lucky... =)
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