DESTRUCTION OF MONEY
The “biggest collapse in the money supply since the Great Depression” continues unabated at this point. (See Ryan McMaken’s article here.)
The decline in the money supply is nearly three years old and dates back to April 2021.
This decline is a destruction of money and is the opposite of what might be expected if one is looking for evidence that could support some of the more extreme expectations and projections for inflation and its effects.
That is because most, if not all, of the analysis about inflation and its effects focuses on the supply of money and its seemingly unlimited growth.
Discussion about money creation by governments and central banks almost universally excludes mention of the demand for money.
DEMAND FOR MONEY
Money has a demand side, too. We are not talking about the demand for goods and services. We are talking about the demand for money, itself. People need money to pay taxes and transact business; to save and invest.
As long as the supply of money is relatively stable and sufficient to finance existing normal economic activity, then the result is price stability. Without price stability, the economy cannot function reasonably.
Since the inception of the Federal Reserve, excessive growth in the money supply has led to a ninety-nine percent loss of purchasing power in the U.S. dollar.
Currently, though, the money supply is not growing. It is shrinking.
A SHRINKING MONEY SUPPLY
A shrinking money supply is directly opposite to that which has happened which has made the U.S. dollar nearly worthless compared to a century ago.
It is also not supportive to arguments that the U.S. dollar is about to collapse and that hyperinflation is on the way.
Without the continual infusions of “new” money, the previous inflationary “highs” cannot be maintained, let alone increased.
If a shrinking money supply continues, the end result is deflation. (see An End To Inflation – Three Possibilities)
WHAT IS DEFLATION?
Deflation is the exact opposite of inflation. The result is a stronger currency. Instead of losing purchasing power, your dollars would buy more – not less.
Deflation is not bad. However, some of the accompanying economic effects would be very difficult to endure. The U.S. dollar would go further, but there would be fewer dollars to go around.
There would be huge price reductions in real and financial asset prices, depressed economic activity and high unemployment. Conditions would rival and probably exceed those of the Great Depression of the 1930s.
Fortunately, at least for now, we are not there yet.
CONCLUSION
An infusion of new money might temporarily reverse the shrinking money supply and its negative economic effects, but that is not necessarily a good thing.
Think of it this way. Would you recommend a new fix to a drug addict who is undergoing withdrawal symptoms resulting from curtailing their drug use and attempting a return to sobriety?
Intentional inflation by government and central banks in the form of cheap and easy credit has created artificial financial highs, bubbles in asset prices, and a false sense of economic security.
You cannot ignore fundamental financial and economic law forever. Sooner or later (more likely sooner), we will all pay the price. (also see Gold And The Shrinking Money Supply)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!