Saturday, June 11, 2022

Money Creation Equals Inflation

 US inflation came in higher than expected yesterday, shocking (why?) markets that were feverishly hoping for some signs of easing. Everyone is now expecting the Fed to raise rates more aggressively.  The projection is for Fed funds to reach around 3.00% by year end 2023. A good estimate is provided by the yield of the 2 year Treasury, see chart below.

Yield Of 2 Year Treasury

Everyone is talking about interest rates, but they’re missing the forest for the tree.  The real issue today is money supply, and almost no one is talking about it - until very recently, that is, when Secretary Yellen vehemently denied that printing $$$^n and sending it out to every American was the cause of spiking inflation.   So, politicians are in full denial mode and are, thus, not helping in the fight against inflation.

Denial can’t negate the obvious fact that when you print trillion$$$ within months and give it out to every American for free, you will create inflation.  The more you print, the higher the inflation.  The evidence speaks for itself - see below.

Money Supply Growth And Inflation

The remedy is equally obvious: cut money supply, and do it aggressively and fast, before inflationary expectations become entrenched into commodity pricing and labor cost expectations. Notice how M2 is still rising at a near historically high annual rate (10%) which in the past produced double digit inflation. Does anyone remember which number we all agonized about, every time it was released back in the late 1970s and early 80s? Yup, it was M2….

A corollary from the above is also about markets, particularly stocks, and memes like cryptos, NFTs, SPACs, and other such crazy-money “assets”: What the money high tide giveth, the low tide shall take away.


  1. The problem isn't really the fed.... the people in the developed world have "developed" this idea that the world owes them a living... And its not just a U.S. thing...

    I lived in Japan for some time, where the joke, how many Japanese does it take to dig a (small) hole has real meaning... the answer seems to be four. One to dig the hole. One to stand in front to prevent anyone falling in. One to stand behind to prevent anyone falling in. And one to supervise.

    It is really funny to watch four adult men spend their days that way... but also kind of sad...

    Well... it cost a lot of money to enable everyone in the developed world to purchase a meaning to live... and until they wake up to the idea that meaning comes from service to others,... not forcing others to pretend we have meaningful service to them... to money printer is going to run...

    sorry for the rant... =)

  2. Perhaps there is a Western sense of economic entitlement, it is a pretty common characteristic of all Empires as they reach their apex and start declining. I strongly believe that Trumpism, so popular amongst the evaporating US working middle class, is a pretty good indication. MAGA is at once a rallying cry and an admission of failure.

    1. yup... and it explains why U.S. politics is so incoherent. You can't begin to formulate a logical policy until you acknowledge that the vast majority of residents are currently, economically worthless... the politician's can't acknowledge it and the voters refuse to see it... so madness upon madness....

      btw, you are right about the historical perspective... heard of the social wars?... basically, Rome's allies declared war on Rome to make Rome acknowledge them as citizens... the peak of empire truly breeds the entitlement that makes everything go insane.