Fiat Money Creation vs. Real Money Creation

Have you ever stopped to think about the sheer volume of Federal Reserve money creation? Comparing fiat money creation to real money creation will give you some perspective.

Earlier this month, the Fed balance sheet ballooned to over $8 trillion for the first time ever. Despite talks of tapering and monetary policy tightening, loose monetary policy continues unabated. Every month, the Fed buys roughly another $120 billion in bonds and mortgage-backed securities with money conjured out of thin air. The central bank’s quantitative easing program amounts to about $1.4 trillion in new bank reserves – freshly “printed” money – annually.

All of this Fed money printing is inflation properly defined.

So, how do we put this into perspective?

One way is to compare Fed money creation to the creation of real money – gold and silver.

In 2020, gold mines globally produced around 120 million ounces of gold according to the World Gold Council. At the current price of around $1,750 an ounce, that comes to about $210 billion of new gold. That means the Fed created more than seven times more dollars than gold produced.

Silver production was around 730 million ounces. At $26 an ounce, that comes to $19 billion. The Fed created just under 74 times more dollars than the value of global silver production.

The expectation that the Fed is going to tighten monetary pressure in the near future has created strong headwinds for both gold and silver, but given the amount of money already created, and the amount of money the Fed continues to create every single month, it seems likely that the price of both metals will eventually begin to reflect this inflationary pressure.

This also reveals just how much value your dollar is losing. The Fed can talk about “transitory” inflation all it wants. The fact is inflation has been nibbling away at your purchasing power for years. According to the CPI inflation calculator, a dollar you earned in 2000 will no buy you just 61 cents in goods and services.

Over the last year, government and central bank policy has put inflation on hyperdrive.

On the other hand, gold has increased in purchasing power over the last two decades. If you bought an ounce of gold in early 2000, it would have cost you about $280. Adjusted for inflation, that same ounce of gold will buy over $1,100 in goods and services today.

This just goes to show that the value of something central bankers can create with a keystroke isn’t necessarily all that valuable.