Is Inflation Around The Corner?

Reach into your wallet, and pull out a Dollar. Since 1914, it has been the official currency of the United States. And since 1971, when the US Note was discontinued, it has been the only currency in the US. Considered by most to be the most stable currency on the planet, it is also the World's reserve currency. Meaning that most international transactions are priced in US Dollars. Giving the US a tremendous advantage in all international trade. Stable, safe and secure: that's the US Dollar. Or is it?

Reach into your wallet, and pull out a Dollar. Since 1914, it has been the official currency of the United States.

And since 1971, when the US Note was discontinued, it has been the only currency in use in the US.

Considered by most to be the most stable currency on the planet, it is also the World's reserve currency. Meaning that most international transactions are priced in US Dollars. Giving the US a tremendous advantage in all international trade.

Stable, safe and secure: that's the US Dollar.

Or is it?

There are some on Wall Street who are concerned that recent actions of the Federal Reserve Board, our nation's central banker, and hence the group that manages, if you will, the dollar. Well there are some on Wall Street is concerned that recent actions at the Fed may actually, harm the Dollars status as safe and secure.

I'm indebted to Sven Hendrick, over at Northman Trader for bringing this to our attention. But before we get to Sven's point, a little background.

So, It's the Federal Reserve along with the US Treasury which authorizes new dollars to be printed. In a process known as managing the Nation's Money Supply.

Ideally, you would like the money supply to match the growth in the economy. For instance, if the economy is growing at say 5% per year. You'd like the money supply to match that, increasing at 5% per year.

In theory at least this would produce a monetary condition of neither inflation nor deflation. A perfect environment where the dollar is steady and any change in the economy's price level is purely a function of the economy's supply and demand. And NOT a function of any monetary distortion.

I have to tell you that currently, we're a long way from that Ideal. And that's where Sven and his chart comes in. You can see this chart, either at the St Louis Fed's Research Site or at my website: reavill.today.

The chart is the long term chart of the US Money Supply. Specifically a chart of the M1 Money Supply, “essentially all funds that are readily available for spending”, to quote the Fed.

Here's what you'll see. From the introduction of the new dollar in 1914, in other words, the Federal Reserve Note, it took 101 years for the M1 Money Supply to surpass 3 Trillion Dollars in circulation. On July 20th, 2015 the Fed reported that they had issued $3 Trillion Dollars.

It had been a slow steady growth over that century to that 3 trillion milestone, and it roughly matched the growth rate of the US Economy. So any excessive inflation was held to a minimum. Money Supply approximated Economic Growth.

But all of that changed in February of this year. In response to the Covid 19 Pandemic, the Fed has been printing money like never before. And that's no exaggeration.

In just 8 months the Fed has added another $3 Trillion to the nation's money supply. That's right in 8 months the Fed has added as many new dollars to our financial system, as they did in the first century of the existence of the dollar.

And don't think that these additional funds are needed because  the economy is so much larger. In fact, our total economy as measured in goods and services were estimated to be $18 trillion in 2015, and will be only $19 trillion this year.

So what's the bottom line here? We are currently in an economy that is only slightly larger than in 2015, and yet we have twice as many dollars in the financial system.

And this dear listener is the reason, I believe, that we've seen this tremendous rally in stocks and other financial assets. More dollars.

And More dollars have also boosted prices in real estate, and are likely to raise prices throughout our economy.

In short it's hard to come to any other conclusion than that a general rise in prices is headed our way. In other words: Inflation.

Because to paraphrase Milton Friedman: “Inflation is always and everywhere a monetary phenomenon.”

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Start listening to Janet "A Little Inflation Is A Good Thing" Yellen.
6:30
Start listening to Janet "A Little Inflation Is A Good Thing" Yellen.
6:30