Wealth Destruction or Inflation


For the last 25 years, U.S. wealth growth has handily outpaced GDP growth(1). In their efforts to avert the consequences of financial crises, financial authorities have repeatedly intervened in capital markets. Those decisions have promoted the enormous debt burden we see today in the U.S and OECD countries.


In 1980, total U.S. debt-to-GDP was 1.8x. Today the figure(2) is a stunning 3.8x.


In 1980, U.S. money supply (M2) was about $1.5T. Today the figure is almost $22T, up from $15.4T just 2.5 years ago.


And now, official inflation is running at over 9% for the first time since the early 1981.


How to bring wealth growth back into line with GDP growth? There’s a politically palatable way and there’s a hard way.


The politically palatable way is to increase interest rates – but not too much; limit money supply growth – but not too much. Limit debt growth – but not too much. Basically take the band-aid off very slowly while telling everyone how committed you are to getting that band-aid off ASAP.


The hard way of course is high rates; contract the money supply; and run federal budget surpluses. But too much of the medicine in a sustained multi-year way risks depression, inviting political and social chaos. Take interest rates, for example. Total interest on all forms of debt was about 14% of GDP at the end of 2021. If rates were to increase across the board by 3% (not even close to the 12%+ Volker raised rates to in the late 1970s), total interest would increase to 25% of GDP(3)…resulting in serious economic contraction.


“The magnitude of today’s debt levels appears to greatly reduce the central bank’s monetary policy options. This is the central difference between the prior inflationary period and the current one. If the inflation cannot be controlled by interest rate increases, perhaps it cannot be controlled. The alternative is to control inflation via the money supply, meaning actually reducing the money supply. The last time that was tried was during the Great Depression, and it did not work out as well as the creators of the theory might have hoped.”(4)

 

1. https://www.epsilontheory.com/hollow-men-hollow-markets-hollow-world-2/

2. https://horizonkinetics.com/whats-new/#interim-q1-q2-2022-commentary

3. Ibid

4. Ibid