Do You Ever Stop Thinking About Money?

We think about money constantly. How to get it, how to keep it, and how to spend it. This is the human condition whether you are rich, poor, or just doing ok. 

This article is about the problem of keeping your money in a world of inflation. 

The Federal Reserve, the U.S. Treasury, the President, and 99% of Congress believe that 2% annual inflation will cause prosperity. This is the Fed’s long-term goal. The problem is that inflation destroys your savings. 

Inflation is not new here. In the last 40 years (1984-2024) the Consumer Price Index (CPI), our measure of inflation, increased 300%, meaning you now need $300 to buy what $100 would buy in 1984. At the Fed’s 2% annual inflation you would need $122 in 10 years to stay even. In 2022, inflation got as high as 9%. Last month it was 3.1%. 

What if long-term inflation was 3% or 4%? How can that be good for the economy?

Our recent CPI rise was caused partially by our self-induced Covid recession when the economy was practically shut down, and partially by the stimulus the government spent to deal with Covid’s impact on the economy.

I’m sure you remember the government lockdowns in March 2020 because of Covid. It severely disrupted the economy and the supply of goods, and business stalled. Prices for many things went up because production slowed and as the supply of goods declined people had to pay more for things. We all recall the scramble for toilet paper. These price rises were temporary and not true inflation. This supply-demand imbalance was easily fixed when the economy was freed up and things went back to normal. Plenty of toilet paper now.

The other reason prices went up is because the Federal Reserve increased the money supply. This is true inflation. Mostly it is a result of deficit spending by the federal government. This is why we still have inflation.

Here’s what happened:

During the Covid pandemic the Trump and Biden administrations spent trillions on various programs to aid health care institutions, provide vaccines, fund businesses claiming need, and distribute cash to citizens. There were three main bills passed: CARES Act – $2.2Trillion; Consolidated Appropriations Act – $2.3T; American Rescue Plan Act – $1.9T; total: $6.4T. That is an unprecedented amount of stimulus. 

The problem with this spending is that they didn’t have the money to pay for it so they borrowed it.

Here’s the wonky explanation of what happened when the government borrowed the money to fund the deficits:

1. The U.S. Treasury borrowed money by issuing Treasury bills, notes, and bonds. 

2. Selected banks bought these bonds, etc. 

3. Because the debt funding was so huge ($6+ trillion), it would have sucked so much money out of the private economy that it would have driven up interest rates which would have further slowed the economy. 

4. To avoid that, the Federal Reserve bought $5 trillion of public and private debt from investors. That injected more money back into the private economy.

5. Where did the Fed get the money to buy it? – it created about $5 trillion of new money out of thin air. We call it “printing” money although they don’t actually print it, they just create an entry in the sellers’ bank accounts to cover the purchase price. 

6. In a two-year period (2020-2022) our money supply, M2, increased by 41%. This is something unprecedented in our recent history and the result was inflation.

Because the supply of things had not magically increased, when you have that much new money floating around, prices rise. Eventually the new money seeps into all corners of the economy and almost all prices go up. That is true inflation. It is a monetary event. The process is much more complicated than this, but you get the basic concept. 

Adding to the problem is that more deficit spending is projected over the next 10 years (Congressional Budget Office data) which will require more government borrowing, more Fed money printing, and result in more inflation. Many analysts believe the government’s funding requirements are understated. The future is impossible to see, but it is more probable than not that our bout with higher inflation isn’t over.

There are consequences to deficit spending besides inflation. One is that the days of cheap interest rates are over. The immense load of present and future public and private debt will keep interest rates high. That is a problem for our government which has to pay interest on the national debt and it is a problem for private borrowers whose projects and investments were based on cheap debt. 

This is why I worry about money. It’s not just me; many well-known investors, bankers, and economists are saying the same thing. Maybe artificial intelligence will lead us to untold prosperity but that is more hopium than reality. Reality is deficit spending forever, an over-leveraged economy, more inflation over time, and higher interest rates. We can’t tax ourselves out of this conundrum, but what we can and should do is curtail government spending and balance the budget.