Let’s cut to the chase. America is in the throes of a virulent underlying inflation. It already afflicts financial markets, where it has fostered huge asset bubbles and a massive, unwarranted shift of wealth to the tippy-top of the economic ladder.
Now soaring prices for everyday goods and services threaten main street jobs, incomes and living standards, too. Wages, family budgets, retirement incomes and hard-earned savings are all under assault by a central bank perversely committed to fostering MOAAR inflation—even as it has remained stubbornly blind to the waste, malinvestment and destructive speculation that rampant financial asset inflation has already engendered.
The Fed’s Doom Loop
This inflationary wave is the toxic spawn of unbridled money-printing. The proxy for that is the girth of the Fed’s balance sheet (red bars), which has expanded from $700 billion in 2003 to $8.1 trillion at present. It accomplished that staggering expansion by printing new digital credits snatched from thin air and using them to scarf-up US Treasury and GSE securities hand-over-fist.
Needless to say, that 1,000% gain in the Fed’s balance sheet dwarfs the barely 100% rise in nominal GDP (black bars) over the same 18-year period, which increased from $11.2 trillion to $22.1 trillion.
This massive disproportion between new central bank credit and added GDP is totally unprecedented. Back in early 2003, when the Greenspan Fed launched a misguided campaign to reflate Wall Street in the wake of the dotcom crash, the Fed’s balance sheet stood at 6.5% of GDP. That ratio was only modestly above the historic 3-5% of GDP that had characterized the Fed since its opened for business in 1914.
After two decades of furious money-pumping, however, those central bank balance sheet footings now stand at nearly 37% of GDP and there is no mystery as to how this vast excess of fiat credit has been absorbed. To wit, it first inflated the bejesus out of financial assets on Wall Street, and now it is lapping up on main street, fueling a surge in consumer prices that have been heretofore suppressed by transitory global deflation in tradable goods and services.
Fed Balance Sheet Versus Nominal GDP, 2003-2021
As we have amplified elsewhere, those deflationary forces are now largely spent, meaning that the latent CPI inflation that has been there all along has finally been uncorked. However, the Keynesian money-pumpers domiciled in the Eccles Building are clueless about this cardinal development and will increasingly become paralyzed and desperate as their “transitory” inflation mantra gets eviscerated by the impending inflationary assault on the purchasing power of paychecks and household finances.