Inflation did not start because the supply of goods and services was scarce and demand high.  If that were the case, then Fed Fund interest rate increases, starting in 2021, would have reduced inflation much lower than 4%.  Instead, rate increases, especially the rapidity with which the Fed increased them, bludgeoned and depressed the private economy.

The seeds of the current, extraordinary inflation cycle started growing in 2008, and for a very different reason from supply and demand.

Before we discuss this cycle, let’s talk a little about Monetary Policy.  The Federal Reserve has several powerful tools at its disposal.  As just mentioned, the current Fed targeted overnight rates that directly affect a depositor’s interest income (a bank’s cost) for deposits. 

Banks balance their accounts every night, and if they have excess liabilities (deposits), then they transfer those excess funds overnight to their account at the Federal Reserve.  Or, when the bank has more liabilities than assets at the end of the day, it borrows to balance those accounts.  This is one of the mechanisms by which the Fed stimulates or depresses economic activity through overnight interest rates.  This is the tool the Fed used to depress economic activity starting in 2021.

The Federal Reserve has another powerful tool at its disposal — namely, the amount of money in circulation, dollar bills printed and circulated or destroyed and taken out of circulation.  That’s money supply. 

This little known device is extremely powerful, and its misuse has long-term consequences.  Increased supply of money in circulation stimulates economic activity.  Conversely, when the Fed deceases the supply, it depresses economic activity.

Like any commodity, more of anything tends to depress the value of that thing.  This is the source of inflation today. Inflation is based not so much on scarcity of products and services, but on excess supply of money.  Remember that money is the ultimate commodity, and if more dollars are printed and circulated, then the value of every other dollar declines.  That inflates the price of everything.  Inflation is dollar devaluation. 

The Federal Reserve’s implementation of Monetary Policy is wrong.  Instead of bludgeoning the economy with high interest rates, the Fed should be decreasing the supply of money in circulation.

Go a little deeper into cause and effect: the Fed printed dollars and increased the supply of money for one reason: Congress and the president needed more money than they could get from tax revenues in order to spend money on federal programs.

This unholy collusion of the Fed Reserve with Congress and the president results in devaluation of the dollar’s buying power (inflation), debt (now costing $1 trillion per year in interest cost) and ever more control by our government over every aspect of our lives.

This is not a government in control, nor existing under the Rule of Law as prescribed by the Constitution.  This is a government that places every citizen, including future generations, into crushing debt, all while demanding more taxes from us to facilitate its useless spending habits.

The simple equation is Spending (by Congress) gives rise to Debt (issuance of Treasury Bonds), which requires printing dollars (by the Fed Reserve), which causes inflation and devaluation of the purchasing power of every dollar we own.  This is a negative feedback loop that leads, inexorably, to the economy imploding under its own foolishness.

This path to serfdom is unnecessary.  We need to enlighten the population to the fact that the government works for us, not we for them.  The Constitution controls the government, not us.  Its sole purpose is to protect the freedom of the individual.

Therefore, the government entities, from the president and Congress to the Federal Reserve and the Treasury Department, must heed our unified demand that they cease and desist their historical, destructive activities.  Federal spending started this avalanche, and that is the source of the problem.

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

Image via Pixabay.