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No Inflation? Money Supply Continues to Grow at Record Rate

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To hear Federal Reserve officials, politicians and mainstream financial media pundits tell it – there is no inflation. In fact, the consumer price index remains “stubbornly low” according to those who view rising prices as an economic good. But inflation defined correctly is rampant. In fact, it is at all-time record levels.

Strictly speaking, inflation is an increasing money supply, and by that measure, it has set records for five straight months.

Last month, year-over-year growth in the money supply (as measured by TMS) came in at 37.56%. That was up 36.92% from July’s record rate. In comparison, the August 2019 increase in the money supply was a paltry 1.86%.

As measured by M2, the money supply grew by 23.23% in August, nearly the same rate as July’s record of 23.29%.

The “true” or Rothbard-Salerno money supply measure (TMS)—is the metric developed by economists Murray Rothbard and Joseph Salerno, and is designed to provide a better measure of money supply fluctuations than M2. This measure of the money supply differs from M2 in that it includes Treasury deposits at the Fed (and excludes short-time deposits, traveler’s checks, and retail money funds).

Money supply growth has never been higher. The only period that came close was the stagflationary period of the 1970s.

The overall M2 total money supply in August was $18.3 trillion and the TMS total was $18.5 trillion. M2 has increased by $2.9 trillion since January. The corresponding increase in TMS was $4.3 trillion. According to the Mises Wire, the TMS total has done something new over the past two months — it has grown to become larger than the M2 total. This is largely being fueled by the immense growth in US Treasury deposits at the Fed, which are factored into TMS, but not M2.

As Ryan McMaken explained in an article on the Mises Wire, this massive growth in the money supply comes in the wake of unprecedented quantitative easing, central bank asset purchases, and various stimulus packages.

The central bank continues to engage in a wide variety of unprecedented efforts to ‘stimulate’ the economy and provide income to unemployed workers and to provide liquidity to financial institutions. Moreover, as government revenues have fallen considerably, Congress has turned to unprecedented amounts of borrowing. But in order to keep interest rates low, the Fed has been buying up trillions of dollars in assets—including government debt. This has fueled new money creation.”

After initial balance sheet growth in 2019 as the Federal Reserve cut interest rates, relaunched QE (although it refused to call it that), and engaged in repo operations to rescue the stock market and shore up a rickety financial system, total Fed assets surged as it responded to the economic distress caused by government shutdowns in the midst of the COVID-19 pandemic.  The Fed’s balance sheet has grown by over 600% from its previous high during the period immediately preceding the 2008 financial crisis. Total assets had declined slightly from the early-June peak but have grown again in recent weeks.

While this record inflationary binge by the Fed has not manifested in significant price inflation as measured by CPI – yet – it has shown up in asset prices – particularly equities. There is no other reason to see record stock market valuations in the midst of a massive economic contraction.

So, why does the mainstream insist there is no inflation? Because it has shifted the definition. It now defines inflation as one symptom of actual inflation. In a nutshell, increases in the price level are not inflation. They are caused by inflation. The government altered the definition to suit its purposes. The common definition used today is nothing more than government propaganda.

So, why does the government want to define inflation as rising prices? Peter Schiff explained in a podcast.

Then it can pretend that it doesn’t cause it. If the government accepts the definition of inflation as an expansion of the supply of money, well everybody knows who is expanding the supply of money. It’s the Fed. So, when you have an accurate definition of inflation, then you know exactly who’s to blame. But if the government can fool people into believing that an effect of inflation is inflation, well then they can blame it on whoever is raising the prices.”

Even if the inflationary policies never lead to rampant price inflation, they still have negative effects on the economy longterm. They blow up asset bubbles that eventually pop, taking the broader economy down with them. Despite what the pundits tell us, there is inflation – lots of it. And it will not likely end well for Main Street America.

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About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
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