Steve Hanke: Money Supply Is Accelerating, Inflation Will Follow #inflation #economy #fed

Key Concepts

• Fiscal Deficit
• Treasury Bills
• Money Market Funds
• Monetization of Deficit
• Money Supply Growth
• Quantitative Tightening (QT)
• Bank Regulation
• Inflation

Fiscal Deficit and Monetization

The transcript highlights a significant fiscal deficit, leading the Treasury to issue a substantial volume of Treasury bills with maturities of less than one year. These short-term debt instruments are being readily absorbed by money market funds. This absorption effectively "monetizes" the financing of the deficit, meaning that the creation of new money is being used to fund government spending. This process directly contributes to, or accelerates, the growth of the money supply.

Factors Influencing Money Supply Growth

The speaker identifies four key factors influencing the money supply, with three of them pointing towards a loosening monetary environment:

1. Monetization of the Deficit: As explained above, the Treasury's issuance of bills and their purchase by money market funds is increasing the money supply.
2. Changes in Bank Regulation: While not detailed, the transcript implies that changes in bank regulations are also contributing to a loosening effect on the money supply.
3. Termination of Quantitative Tightening (QT): The cessation of QT, a process where the Federal Reserve reduces its balance sheet by not reinvesting maturing assets, is another factor that will lead to an increase in liquidity and thus money supply growth.
4. Fed Funds Rate: The future path of the Fed Funds rate is uncertain, but the other three factors are clearly pushing towards looser monetary conditions.

Accelerated Money Supply Growth and Inflationary Risks

The confluence of these factors is expected to result in a faster growth rate of the money supply. The speaker emphasizes that there is a lag between changes in money supply growth and their impact on inflation. However, looking ahead, the primary concern identified is an increase in inflation, directly attributed to this accelerated money supply growth.

Conclusion

The core argument presented is that a combination of a large fiscal deficit being monetized through Treasury bill issuance, changes in bank regulation, and the termination of quantitative tightening are creating conditions for accelerated money supply growth. This, with a subsequent lag, is projected to be the significant risk factor leading to higher inflation in the future.