Tag Archives: Money Supply

U.S. Money Supply Drives Inflation

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“Inflation is always and everywhere a monetary phenomenon.” – Milton Friedman

Economist Steve Hanke view has been that the volatile and non-transitory inflation of recent years is chiefly due to changes (a significant increase) in the US money supply, not other factors such as supply-chain disruptions and swings in energy and metal prices.

Hanke, a former economic advisor to Ronald Reagan, served as the president of Toronto Trust Argentina when it was the world’s best-performing market mutual fund in 1995.

“As Milton Friedman taught us long ago, inflation is always and everywhere a monetary phenomenon,” Hanke said. “That’s why our forecast, based off the quantity theory of money, has been so accurate.”

“Inflation is taxation without representation.” ~ Milton Friedman

The veteran economist Hanke and a colleague, John Greenwood, predicted in July 2021 that the headline Consumer Price Index would rise as quickly as 9% on an annualized basis; it peaked at 9.1% a year later. They later forecast the inflation measure would fall to between 2% and 5% by December last year, and it ended the year at 3.4%.

“Money [supply] is the economy’s fuel,” Hanke and Greenwood warned the US economy was “running on fumes” and “on schedule to tank” given its money supply had contracted since March 2022, after growing by a historic 27% in part due to fiscal stimulus measures during the COVID-19 pandemic.

References:

  1. https://markets.businessinsider.com/news/stocks/steve-hanke-stocks-economy-outlook-recession-inflation-forecast-fed-money-2024-1

Will Higher Interest Rates Tame Inflation?

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Interest rates don’t determine inflation; the amount of money circulating in the economy determines inflation.  At this point, there are over $5 trillion in excess money in the system. Brian Wesbury

While inflation roars at its highest level in four decades, President Joe Biden tried to downplay skyrocketing inflation, insisting it was only up “just an inch” in the short term.

“Well, first of all, let’s put this in perspective. Inflation rate month to month was just– just an inch, hardly at all,” President Joe Biden on Sixty Minutes

Despite the fact that consumer prices rose in August by one-tenth of a percentage point to 8.3 percent, economists had expected inflation to go down. Additionally, median inflation hit the highest level ever recorded.

The median CPI, which excludes all the large changes in either direction and is better predicted by labor market slack, is extremely ugly at 9.2% annual rate in August, the single highest monthly print in their dataset which starts in 1983 (second highest was in June).

The Federal Reserve has been raising interest rates since March to slow the economy in a bid to tame America’s worst bout of inflation in four decades. However, the data suggested that their efforts have not yet had much of an effect.

The Federal Reserve raising interest rates may reduce economic growth, make capital more expensive and may throw the US economy into recession, however there is no guarantee that these actions will tame or fix inflation, opines Brian Wesbury, Chief Economist, First Trust Advisors L. P. Interest rates, supply disruptions or Russian’s war in Ukraine don’t determine inflation; the amount of money circulating in the economy determines inflation.  

“Inflation is always and everywhere a monetary phenomenon.” ~ Milton Friedman

The Fed’s balance sheet held $850 billion in reserves at the end of 2007.  Today, the balance sheet is close to $9 trillion.  Most of these deposits at the Fed are bank reserves which the Fed created by buying Treasury bonds, much of which was money the Treasury itself handed out during the pandemic.  At this point, there are over $5 trillion in excess money in the system.

Technically, banks can do whatever they want with these reserves as long as they meet the capital and liquidity ratio requirements set by regulators.

  • They can hold them at the Fed and get the interest rate the Fed sets, or
  • They can lend them out at current market interest rates.  

In turn, the big question is whether the Fed can pay banks enough to stop them from lending in the private marketplace and multiplying the money supply.

The Fed has never tried to stop bank lending in an inflationary environment by just raising the interest rate on excess reserves (IOER). Moreover, the Fed is now losing money on much of its bond portfolio because it bought so many bonds at low interest rates. At some point the Fed will be paying out more in interest than it is earning on its securities.

Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today.

References:

  1. https://www.ftportfolios.com/Commentary/EconomicResearch/2022/9/19/will-higher-interest-rates-tame-inflation
  2. https://www.breitbart.com/economy/2022/09/13/underlying-inflation-reaches-scorching-new-record-high/

“Taxes now impose a greater burden on the average American household than the combined cost of food, clothing, education, and health care.”