When More Isn’t Better Money Inflation

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Over the last 40 years, monetary policy has caused interest rates to decline from a high of around 20% down to the zero bound. During the same period, the U.S. dollar (USD) money supply has expanded at a rate never before seen in modern history and asset prices in dollar terms exploded to the upside, all while the U.S. average hourly wage has lagged on an unprecedented scale.

Ironically, the growing wealth gap, caused by lagging wages and rising asset prices, has occurred while the Federal Reserve (Fed) has been targeting a 2% inflation rate and pushing the narrative that inflation is good for the economy, good for economic growth and, most of all, good for the average Joe. This makes us wonder why the Federal Reserve, through monetary policy, is adjusting interest rates and setting inflation targets and whether this intervention is really benefiting the economy.

To start, let’s focus on the question: Why are we seeing this intervention from the Fed? The United States has a total debt to Gross Domestic Product (GDP) ratio of 257%.¹ This fragile debt house of cards, which the Federal Reserve has created, has caused them to fear deflation and its effects on the economy. The Federal Reserve is then essentially forced to intervene so that they are not perceived as the ones allowing the economy to collapse. They do this primarily through the lowering of interest rates and through inflation, or in other words, a debasement of the currency through an expansion of the money supply. This intervention leads to an increase in consumption, asset purchases and malinvestment, which, in turn, leads to an ever-increasing debt burden and an ever-greater deflationary headwind on the economy. The cycle then repeats itself with the Fed having to intervene time and time again. The Federal Reserve is stuck in a negative feedback loop which they themselves have created.


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