The recent explosion in the United States money supply has sparked new fears about inflation. For the first time, economists are closely studying the impact of aggressive monetary policies. So in a sense, inflation always happens because the amount of money and bank notes in circulation increases. It includes an increase in bank deposits that are convertible to cash by writing a check. That, among many other recent developments, has analysts concluding that the U.S. economy is becoming addicted to easy money. They maintain that low-interest rates are critical for maintaining its growth.
By May 2023, the M2 money supply reached approximately $21.94 trillion. This broadest measure includes paper and coins, checking accounts, and items that can be quickly translated into checking account funds. This figure represents a monumental increase from a little over a year ago. At that time, the money supply had just touched a new bottom at $20.60 trillion. As a recap, during the COVID-19 pandemic, the Federal Reserve did QE on steroids and pumped almost $5 trillion into our economy. This unprecedented wave of cash stoked inflationary fears.
New data shows that the Rothbard-Salerno measure of the money supply decreased at a 2.2 percent annual rate from April 2022 to April 2023. With this growth comes a long-awaited upward trend. On a month-over-month basis, the money supply grew by 0.6 percent from March to April. In fact, this increase marks a continuation of a trend we’ve seen over eight of the last twelve months.
The year-over-year growth rate for the money supply was 4.5 percent in May, compared to 3.9 percent in March. Analysts point to a remarkable shift in the money supply. Of it, more than two-thirds has been created—over $12 trillion just since 2009. Alarmingly, almost 26 percent of the current money supply has been created since January 2020. That’s about $5 trillion of $19.4 trillion total.
More recently, economists have argued that the amount of money the government has created directly affects inflation. Ludwig von Mises, a noted economist, articulated this relationship succinctly:
“Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check.” – Ludwig von Mises
On the ground, high inflation quickly becomes interpreted as a consequence of too much money – printing. Economic experts on all sides of the aisle agree that government monetary policies are primarily to blame for these inflationary pressures.
The Federal Reserve is now stuck in a real double-edged sword or Catch-22 type of situation. On the one hand, it has to lower interest rates to prop up an economy ever-more addicted to cheap money. Conversely, maintaining the current rate may be crucial to preventing inflation from continuing its recent upward trajectory. The ongoing tension between stimulating economic growth and controlling inflation has led to calls for careful scrutiny of monetary policies.
Since 2009, the TMS money supply has grown by almost 194 percent. This level of dramatic growth begs the question of sustainability and economic catastrophe should this growth go uncontrolled much longer. Just to return the Fed’s balance sheet to pre-2019 trends, it will need to reduce the money supply by at least $3 trillion. This is no easy feat, not to mention the increasingly challenging economic climate.
In recent months, Federal Reserve Chair Jerome Powell acknowledged the limitations of current monetary policy tools:
“Our tool only does one of those two things at the same time.” – Powell
Policy makers have a Herculean task ahead of them. One, they have to swim against a deeply entrenched tide of conflicting goals in an economy long-impacted by years of low interest rates and easy, cheap credit.
These money-saving tactics have important impacts that extend well outside the numbers. Second, they affect American consumers and businesses directly and therefore meaningfully. A slowdown in consumer spending, which is most likely as rising prices erode purchasing power, could have cascading negative effects on the economy.
That is the debate that policymakers are having today as they discuss what to do next. They need to consider the immediate upside versus the future downside of continued monetary development. Where inflation goes from here will hinge largely on how well they pull off this high-wire balancing act.