Speculative manias are in the air, as evidenced by the recent price hikes for Bitcoin, a digital asset with a base value of zero, and GameStop, a declining retailer. Together with the other economic trends – a strong recovery, rising commodity prices, and a surge in inflation – these asset bubbles have a clear cause: the massive expansion of money and credit.
But America’s fiscal and money masters are turning a blind eye. They focus exclusively on improving the job market. With the passion of the Messiah, Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen tell us that the only way to save the job market and achieve full employment is to keep adding fiscal and monetary fuel to the fire . However, their rules and prophecies, modeled on the 2008 financial crisis playbook, are no longer valid today.
After that crisis, the Fed embarked on quantitative easing that massively expanded its balance sheet. At the same time, commercial banks were busy shrinking their loan books and writing off losses on mortgage debt and securities, which meant that the Fed’s injections hardly more than offset the decline in commercial banks’ balance sheets. As a result, money supply growth from 2010-19, as measured by the Fed’s broadest monetary measure, M2, averaged just 5.8% per year.
While the money on the Fed’s books grew rapidly, the money in the hands of the public grew slowly. Spending and inflation were subdued and the post-crisis recovery was anemic as inflation remained below the Fed’s target. In contrast, China’s monetary growth exploded in 2009 and 2010, averaging 23% per year. As a result, China achieved a strong recovery, but also a surge in inflation, which rose from minus 1.8% in July 2009 to 6.5% by July 2011. Money is important.
Fast forward to February 2020. Since then, the money supply in the US economy, as measured by M2, has grown by a staggering $ 4 trillion. That’s a one-year increase of 26% – the largest annual percentage increase since 1943.