BANKNOTE – Inflation, money supply and spending

When the Federal Reserve was created in 1911, its Prime Directive was to protect the Value of the US Dollar.  We see the effect of the Fed’s failure to do so: Inflation is destroying the value of every dollar we earn and save.  In practical terms onw must spend more dollars for every purchase made, even when the item is identical.  We get the same product or service, but it takes more dollars now.  This is devaluation in the buying power of the US Dollar.  This is inflation.

It may seem counter-intuitive, but the greater the number of dollars in circulation, the less each dollar buys.  The proper level of liquidity (money supply) is determined by the size of the nation’s economy (measured in GDP) and by the velocity of money (how often it changes hands via transactions).  Liquidity is a most powerful tool.  The amount of money in circulation is a critical element in maintaining the value of the dollar, the Prime Directive.

So here we are in the midst of the worst inflation in decades caused by the very entity created to keep the value of the dollar safe. The Feds complicity in dollar devaluation / excess liquidity began in 2008, the Federal Reserve embarked on printing $8 Trillion US Dollars, called Quantitative Easing or QE,.  The objective of printing dollars was to allow Congress to continue their profligate spending habits.  To give perspective, the Feds balance sheet increase from $800 Billion in 2008 to $9 Trillion today.  That is devaluation in the buying power of the dollar, that is inflation.

Not only is inflation making the dollar’s purchasing power less, consider that the Fed placed us into debt to facilitate spending.  They used those printed dollars to buy Treasury Bonds, a promise to repay in the future.  Bonds represent debt, our debt.  We citizens have to pay it back as do future generations.  Remember the mantra, spending equals taxation and debt, cut the spending and force congress to repay the debt, and more importantly, don’t allow the Fed to place us into debt again.  Evident in the following chart is the massive increase in federal spending.  Our objective should be to restore the level of federal SPEMDING TO 10% OF GDP.       

Non-defense spending by the federal government (including entitlements like Social Security) has climbed dramatically.

  • 10% of GDP in the 1960s
  • 14.8% of GDP in 2001
  • 15.2% of GDP in 2007
  • 17.8% of GDP in 2019
  • And now, projected at roughly 22% of GDP over the next 5 years, after peaking at 27.7% in 2020

In other words, non-defense spending now consumes more than twice as much GDP every year as it did 60 years ago. 

Brian S. Wesbury, Chief Economist, FT Financial

Call it a negative feedback loop: the congress under Obama, Trump and Biden wanted to spend more than income generated through taxation and thereby, expand federal influence.  In 2008 US Treasury Bonds weren’t selling because foreign nations lost faith in our debt or Treasury Bonds, so the Fed Reserve and Treasury Department colluded to print funny money (QE) to buy Treasuries so congress can spend more money and help the depressed economy.  It didn’t work, it never does.

To add insult to injury, that debt carries an interest cost.  That cost increased dramatically when the Fed raised interest rates. We get to pay that off too.  

… causing net interest expenses to skyrocket.  In 2020, the net interest expense was $332.6 billion.  In the past twelve months, it has totaled $730.4 billion.  – Brian Wesbury, FT Financial

Even though excess money supply is stimulative, the free market economy from 2008 to 2016 was crushed by anti-business fiscal policy.  Rather than admit that more government is not the answer, the big-gov politicians doubled down. Fiscal policy interference (regulation and tax increases) precipitated the Great Recession of 2008. 

The President had lots of help setting up the Great Recession.  Go back to the 1990’s when Dodd and Frank set up FNMA to buy sub-prime mortgages.  The mere act of writing substandard debt is irresponsible but facilitating it by federal action is unconscionable.  And the fabric unwinds…our economy was plunged into the deepest and longest lasting recession since the Great Depression.   The economy has very long cycles, but the consequences of poor choice always show up.

 Following this thread we see that our own government agencies and the politicians we hired to run it, caused the vast majority of problems.  The solution is simple.  Follow the Constitution, limit government interference in our lives.  Realize that the best way to limit government is to prevent government from spending and prevent them from putting citizens into debt.  

A bunch of old “white” guys realized this almost 300 years ago.  Surely three centuries later we are smarter. –

Jay Davidson is founder and CEO of a commercial bank.  He is a student of the Austrian School of Economics and a rabid capitalist.  He believes there is a direct connection between individual right and responsibility, our Constitution, capitalism, and the intent of our Creator.